Mutual Fund Flows When Managers Have Foreign-Sounding Names

Oliver Spalt is Professor of Behavioral Finance at Tilburg University. This post is based on an article authored by Professor Spalt; Alok Kumar, Professor of Finance at the University of Miami; and Alexandra Niessen-Ruenzi.

In our paper What’s in a Name? Mutual Fund Flows When Managers Have Foreign-Sounding Names, forthcoming in the Review of Financial Studies, we show that name-induced stereotypes affect the investment choices of U.S. mutual fund investors. Managers with foreign-sounding names have about 10% lower annual fund flows, and this effect is stronger among funds with investor clienteles that are more likely to be suspicious of foreigners ex ante.

Our results are based on a novel, hand-collected dataset that contains measures of foreignness of a large sample of mutual fund managers. Specifically, we conduct an online survey in which we present US residents with almost 4,000 actual fund manager names for actively managed US equity funds that appear in the CRSP database from 1993 to 2011. We then ask survey participants to rate for each name, whether or not it sounds foreign to them. Using their responses, we obtain for each fund a measure of whether the name of its manager sounds foreign to an investor when heard, read in a fund prospectus, or when it is found on a mutual fund web site. We hypothesize that the perceived foreignness of a name might trigger social biases such as discrimination and stereotyping and, thus, influence the investment decisions of mutual fund investors. We match our new dataset with the universe of actively managed US equity funds in the CRSP database to test this hypothesis.

Our key finding is that flows in funds managed by individuals with foreign-sounding names are around ten percentage points lower, compared with similar funds managed by individuals with typical American names. Further, compared with an otherwise identical fund managed by an individual with an American name, managers with foreign-sounding names experience 14.2 percentage points higher outflows and 46.7 percentage points lower inflows when their recent performance is in the bottom or the top decile of all mutual funds, respectively, i.e. when their performance is very salient. Importantly, we observe these flow differences even though funds managed by individuals with foreign-sounding names are very similar to other funds in terms of performance and they manage the same underlying assets (US equity). There are no significant differences in fund or fund manager characteristics either. The results are therefore consistent with an explanation based on taste-based discrimination.

Three additional sets of results support such an explanation. First, we look at several natural experiments. In particular, using the 9/11 terrorist attacks as an exogenous event that may have exacerbated negative stereotypes against individuals with names of South Asian and Middle Eastern origin, we find that fund managers with Middle-Eastern and South-Asian-sounding names experience a drop in fund flows relative to other managers with foreign-sounding names after 9/11. We also exploit a change in the law governing disclosure of individual names for team-managed funds and demonstrate that fund management companies were more likely to assign managers with foreign-sounding names to teams before the change, presumably because they were then effectively invisible to fund investors.

The second set of results supporting a taste-based explanation is based on online experiments in which we randomly assign fund manager names to funds. We find that subjects allocate 10.8% less money to an index fund managed by an individual with a foreign-sounding name. The size of the effect is similar to the results we obtain using actual flow data. We conduct two additional experiments around the Boston bombings in April 2013 and find that the allocation gap widens substantially following the event. Those experiments establish a causal channel from names to flows.

The final set of results supporting a taste-based explanation is using a small sample of customers at a large U.S. discount brokerage house. We show that individuals who live in regions with a greater proportion of foreign-born individuals invest more in foreign funds. This evidence is consistent with our conjecture that in-group bias affects the investment choices of individual mutual fund investors.

The paper closes by discussing potential mechanisms, which would lead fund companies to employ managers with foreign-sounding names in equilibrium. Those mechanisms include lower pay for fund managers with foreign-sounding names, which we cannot test with our data.

In sum, we provide evidence of name-induced taste-based discrimination among mutual fund investors. Our findings show that social biases, such as in-group bias and stereotyping, can affect capital allocations even in the most liquid and competitive capital markets in the United States.

The full paper is available for download here.

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