Bridge over ocean
1 March 2016 CFA Institute Journal Review

What’s in a Name? Mutual Fund Flows When Managers Have Foreign-Sounding Names (Digest Summary)

  1. Neeti Goyal

Fund cash flows are affected by the bias of US mutual fund investors against fund managers with foreign or foreign-sounding names. Managers with foreign-sounding names are punished more compared with those without foreign-sounding names when they perform badly and are rewarded less when they perform well.

What’s Inside?

Studies have shown that gender and behavioral biases exist. But people probably have not thought that a fund manager’s name could affect the fund’s fortune. This research shows that ethnic discrimination matters in financial markets. The authors present the preference of US mutual fund investors for managers with typical American names over managers with foreign-sounding names.

How Is This Research Useful to Practitioners?

US mutual funds that have managers whose names sound foreign are suffering in the wake of terrorist attacks (e.g., 9/11) with about 10% less annual fund flows compared with funds that have managers with American names but the same level of investment skill. Such funds also miss out on annual fee income. People consciously or subconsciously assign attributes to a person when they hear the person’s name. The more suspicious investors are of foreigners, the more biased they are against them. Running experiments on two identical hypothetical funds following the Boston bombings in April 2013, the authors find abnormal outflows from funds whose managers have Middle Eastern–sounding names. But they also find that a foreign-sounding name does not cause lower risk-adjusted returns.

The current research again substantiates that investors are not rational and base their decisions on their perceptions and gut feelings. The authors suggest that one reason for still hiring foreign managers is to show diversity to lure more customers and to show adherence to better employee policy. The research is insightful for investors as well as professionals.

How Did the Authors Conduct This Research?

The authors collected the names of all fund managers who managed an active US equity fund between 1993 and 2011. Using the Amazon Mechanical Turk (AMT) platform, they then asked a random sample of 150 US residents to evaluate which names they thought sounded foreign. Based on this classification, the authors then did a statistical analysis and find that actual fund flows are 10% lower when the fund manager’s name is perceived as foreign. They estimate flow regressions with net fund flows as the dependent variable and a dummy independent variable that indicates whether a manager’s name sounds foreign. The authors find no statistically significant difference between any of the other fund characteristics (e.g., turnover, expense ratio, fund risk, and fund flows). They do not differentiate whether the foreign fund managers are US citizens.

To test the impact on fund flows of the 9/11 terrorist attack in 2001, monthly data of net flows around September 2001 are gathered for fund managers who have Middle Eastern–sounding names. The authors also conduct placebo tests and online surveys as well as use other experimental approaches to further corroborate the findings. The results of the research provide additional evidence of the impact of fund manager names on investment choices made by fund investors.

Abstractor’s Viewpoint

There is ample evidence in the behavioral finance literature that social biases, such as gender preference, influence investors’ perceptions of economic value, so it is not surprising to find a study that confirms name-related stereotypes also can affect investors’ financial decision making. The authors find that name-induced biases significantly affect fees and fund flows for mutual fund companies that employ managers with foreign-sounding names. But data also indicate that funds still continue to keep managers with foreign names, which implies that there is some benefit to keeping them. Further examination of this matter would be a good topic of research.

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