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Investors distrust ‘foreigners’ too – study
An analysis of US fund flow data based on how “foreign” a manager’s name sounds shows significant bias among mutual fund investors over an extended period, particularly in regions where racial or ethnic stereotypes are more pronounced.
Work by Dr Alexandra Niessen-Ruenzi of the University of Mannheim, presented at a Sydney University seminar last week, shows that stereotypes associated with a person’s name affect the investment choices of US mutual fund investors.
The professor and chair of corporate governance at the university said that managers with “foreign-sounding names” have lower fund flows, even though there were no significant differences in their investment style and performance.
She said: “These managers also experience lower appreciation in flows following good performance and greater decline in flows following poor performance. The flow effects are stronger for funds that have more conservative investor clienteles or are located in regions where racial/ethnic stereotypes are more pronounced.
“Further, following the 9/11 terrorist attacks, fund managers with Middle Eastern and South Asian names experience a drop in fund flows relative to other managers with foreign-sounding names.”
In an experimental setting, it was discovered that individual allocated 14 per cent less money to an index fund managed by an individual with a foreign-sounding name.
“Our rough calculations indicate that lower fund flows can reduce the annual compensation of managers with foreign-sounding names by over US$100,000,” Professor Niessen-Ruenzi says.
“Collectively, our results provide evidence of taste-based discrimination and show that social biases affect capital allocations even in one of the largest and most liquid capital market segments.”
The academic has done other research on social biases, including that involving preferences for male fund managers over female managers. She has also studied the employment prospects for women in the funds management industry, which tend to be not as bright as for men.
