Investors in the US are less likely to invest in mutual funds that have managers with foreign-sounding names, according to a new study from the University of Miami School of Business Administration.
The study, forthcoming in The Review of Financial Studies, found that annual fund flows were 10 per cent lower for funds managed by someone with a more familiar American name, an annual loss of approximately USD133,000 per USD195 million under management.
The study also found:
• These effects are stronger for funds that have more conservative investor clienteles or are located in regions where racial/ethnic stereotypes are more pronounced. The impact occurs even though managers with foreign-sounding names do not follow unique investment styles or have inferior investment skills. On the contrary, individuals who live in regions with a greater proportion of foreign-born individuals invest more in funds run with foreign sounding names.
• Funds with foreign-named managers receive lower inflows after good performance and they experience relatively more outflows after bad performance. In other words, managers with foreign sounding names are rewarded less for good performance and "punished" more for bad performance.
• Among the best performing funds in the 80th percentile of the performance missed out on USD318,432 in advisory fees. For extreme out-performers, the loss of compensation can get even worse, climbing to almost USD700,000 in lost fees.
• After the Boston Marathon Bombings and 9/11 terrorist attacks, trust in foreign names saw a significant drop.
"We know that people consciously or sub-consciously assign attributes to a person when they hear their name – President Obama said it well when he joked that he got his middle name, Hussein, from someone who clearly didn't know he'd ever run for president," says Alok Kumar, Gabelli Asset Management Professor of Finance at the University School of Business Administration and the leader researcher. "Our study suggests that if Barack Obama was a fund manager his name could cost his fund more than USD100,000 this year," adds Kumar, whose research partners included Alexandra Niessen-Ruenzi of the University of Mannheim and Oliver Spalt of Tilburg University.
MethodologyThe researchers used a dataset of the names of 6,000 fund managers who managed an active US equity fund between 1993 and 2011. They then asked a random sample of 150 US residents to evaluate the names and offer which names sounded foreign to them. They then used statistical tools to show that for funds managed by someone with a name perceived as foreign, annual fund flows were 10 per cent lower than for funds managed by someone with a more familiar American name. To gather stronger support for their hypothesis, the researchers focused on fund flows around 9/11 attacks and the Boston marathon bombings. They found that even among funds with foreign-named managers, flow to certain funds with Middle-Eastern sounding names declined. It is very unlikely that those managers became less skillful during the period following these events and the decline in flow is most likely due to an increase in aversion to foreign names.
"Though only a fraction of this cost is experienced by the fund manager, the cumulative cost of having a foreign-sounding name over the entire career span of a fund manager can be significant," says Kumar. "These findings add to the economics literature on discrimination, which shows that despite growing public awareness, discrimination influences decision-making in many areas, including legal courts, sports refereeing, consumer choice, and labor markets. By focusing on the mutual fund industry, our paper adds a new dimension to this debate."
