New research by Stefan Jaspersen and Peter Limbach finds evidence that a lack of diversity in US mutual fund manager teams can benefit fund investors because they gain an information advantage by being similar to corporate leadership.
The results indicate that in light of the lack of diversity in the corporate C-suite, fund manager team diversity may have costs resulting from fewer similarity-induced information advantages. As such, the study has potential implications for fund manager team composition and thus for fund families’ hiring policies.
It also provides a rationale for the current lack of diversity among mutual fund managers. Importantly, the study also indicates that with increasing diversity in the corporate C-suite, the net benefits of fund manager diversity are likely to increase.
Leadership in the United States still lacks diversity. Corporate America is largely run by white men. The same is true for the investment industry. For example, only about 10% of mutual fund managers in the United States are women. While many people highlight the pros of diversity and condemn discrimination, only few ask whether diversity may also have costs.
The new study uses almost 2.7 million combinations of mutual fund managers and corporate CEOs and finds that being demographically similar to the CEO of a company facilitates fund managers’ information production. Fund managers overweight firms whose CEOs resemble them in terms of age, gender, and ethnicity, and their investments in those firms are associated with better performance.
Specifically, fund managers’ trade performance, i.e., the performance of purchases relative to sales, is 33 basis points per quarter (1.32% annually) higher for trades in firms of entirely similar CEOs compared to fund concurrent trades in dissimilar CEOs. Given that the average performance of purchases relative to sales in the authors’ sample is -22 basis points, this difference in trade performance is economically meaningful.
Previous research mainly documents that familiarity to others results in biased investment decisions, with little evidence for informational advantages. But theories of screening discrimination or information-based homophily suggest that similarity to others can facilitate the interpretation of signals.
Sharing the same background with a firm’s CEO, for example because the investor and the CEO are of a similar age or have the same gender, can help the investor interpret information from and about the CEO. Among other things, investors may find it easier to read between the lines and interpret CEOs’ verbal and nonverbal communication in conference calls or investor presentations, and they may also be better able to anticipate CEOs’ behaviour and decisions.
Consistently, the authors provide additional evidence suggesting that fund managers can better assess a CEO’s fit for his or her company and have a better understanding of the firm’s fundamental information if the CEO is demographically similar. They also rule out that their results are driven by personal ties between fund managers and CEOs, which may result in privileged access to information.
In sum, and all else equal, the results indicate that, in light of the lack of diversity in the corporate C-suite, fund manager team diversity may have costs resulting from fewer similarity-induced information advantages. As such, the study has potential implications for fund manager team composition and thus for fund families’ hiring policies.
It also provides a rationale for the current lack of diversity among mutual fund managers. Importantly, the study also indicates that with increasing diversity in the corporate C-suite, the net benefits of fund manager diversity are likely to increase.
‘Screening discrimination in financial markets: Evidence from CEO-fund manager dyads’ by Stefan Jaspersen and Peter Limbach from the University of Cologne, Germany
Contact details
Stefan Jaspersen
Department of Finance
University of Cologne
Phone: +49 (0) 221 470-3165
Email: jaspersen@wiso.uni-koeln.de
Peter Limbach
Department of Finance
University of Cologne
Phone: +49 (0) 221 470-6966
Email: plimbach@wiso.uni-koeln.de