Investing in stocks and shares may seem like a matter that requires a cold and calculating mind.  Alas, new research from the University of Notre Dame reminds us that even the most unexpected things can influence how investors make decisions.

The research set out to explore whether the political polarization that is such a feature of modern society is also influencing investment decisions.  They examined data from around 2,500 fund managers between 1992 and 2016, with all of the fund managers having disclosed either donations to political candidates or membership of political action committees.

The research found teams with managers from a diverse range of political viewpoints seemed to perform better than teams that had a uniform political outlook.

Explosive circumstances

Or at least that was the case when political circumstances were relatively benign and there was minimal polarization.  When polarization was higher, it seemed that financial decision making suffered regardless of the makeup of the teams.

The researchers believe their work clearly illustrates how important it is, especially in times as polarized as these, to explore bipartisanship as intently as possible, if for no other reason than it produces better results.

It also highlights how diverse teams make different investment decisions, both in terms of the stocks they picked, the industries chosen and the investment decisions they make.  This resulted in diverse teams tended to outperform more politically homogeneous teams by around 0.4% per year.

Polarized teams

While polarized political environments were harmful to all teams, they appeared to be particularly harmful to more diverse teams.  Indeed, there was even evidence that things like promotion and demotion were influenced.

For instance, in times of low polarization, promotional decisions were typically based on the past performance of the fund manager.  In polarized times, however, past performance didn’t seem to matter if the fund manager had a different political outlook to the average manager in their firm.

There were also interesting variations in investment decisions.  For instance, in teams with similar political ideologies, any gains that were made were typically reinvested in the same stocks as before.  This ultimately hurt performance in the long run.  Diverse teams tended to keep more diverse portfolios, which boosted performance in the long run.

There were also differences in the kind of stocks invested in, with managers with Democratic leanings more likely to invest in stocks with good social and environmental credentials, with Republicans less likely to do so.

The researchers believe their findings are a timely reminder that political polarization doesn’t just affect the political world, but has implications across a wide range of sectors.