Takeaways:
- New research from UBC Sauder shows that the investment choices of wealthy investors are increasingly influenced by their politics
- The effect began amplifying during Barack Obama’s presidency
- In counties where conservative broadcaster the Sinclair Group began broadcasting, the effect became more pronounced
- The study shows the political leanings of people’s investment advisors have little effect
- If the effect continues, the financial polarization could have major economic and social impacts
When wealthy investors put their money into the stock market, they’re usually aiming for a solid rate of return. But a new study from the UBC Sauder School of Business shows a growing number of high net-worth investors aren’t only choosing stocks for financial reasons: their picks match their politics.
For the study, titled Political Divide and Partisan Portfolio Disagreement, the researchers examined the holdings of investment advisors in the U.S. who typically cater to individuals in their local areas — and are required to file their aggregated holdings with the U.S. Securities and Exchange Commission — as opposed to large institutions such as pension funds which represent a much broader swath of investors.
The researchers looked at a host of factors that could explain the difference in investment portfolios between regions, among them population density, per capita income, education, religiosity, and industry composition. For example, if the predominant local industry is auto manufacturing, and people work in that industry, they might want to invest in that business — or decide to diversify and invest elsewhere.
But one factor clearly stood out as the difference-maker: politics. Specifically, the researchers calculated “political distance” — that is, the difference between fractions of votes for the Republican, Democrat and Independent candidates from 1996 to 2020 — and examined how those voting patterns correlated with investment choices.
“What was really surprising is that political distance ended up being the most robust predictor,” says UBC Sauder Assistant Professor Dr. Elena Pikulina, who co-authored the study with Dr. Yihui Pan from the University of Utah, Dr. Stephan Siegel from the University of Washington and Dr. Tracy Yue Wang from the University of Minnesota.
“As financial economists, we identified various economic factors to explain the wide differences among counties. Yet when examining the same county over multiple years, politics consistently stands out as a persistent and highly significant factor influencing investments.”
According to Dr. Pikulina, Republican and Democratic investors increasingly invest in different sets of stocks — Republicans might invest in fossil fuels, for example, while Democrats might put their money into green energy.
Previous research has shown that both sides tend to shy away from companies whose CEOs don’t have the same political orientation as their own. For example, multinational investment company BlackRock has gained investors because of its emphasis on ESG (environmental, social, governance), but lost others who don’t have the same political beliefs — even if they could stand to gain financially.
“Some people say, ‘You have an agenda and I believe this agenda could hurt my financial returns,’” says Dr. Pikulina. “Others just say, ‘I just don't like this agenda, and I don't want to be a part of it.’”
The research team looked at data from 2001 to 2019, but the effect was especially pronounced beginning with the second Barack Obama’s presidency and has become more and more amplified ever since — to the point where, looking at the entire U.S., the political distance is 40 per cent greater than it was in 2001.
To further test the political distance effect, the researchers examined the impact of the entry of the Sinclair Broadcast Group — a large conservative TV network — in various local media markets. Earlier studies showed that when Sinclair enters a market, it boosts Republican votes, and the researchers confirmed that when Sinclair arrived, portfolio distance also increased, further solidifying the link between portfolios and politics.
The team also tested whether the advisors’ political preferences affected their clients’ portfolio weights, but found they did not have a significant impact.
Dr. Pikulina says the magnitude of the phenomenon is surprising, and if it continues along the same trajectory, it could lead to substantial side effects — not only for individual investors whose returns could suffer, but also for society as a whole.
“In an extreme scenario, we could end up with Republicans owning one half of the economy and Democrats owning the other half, and their economic interests would diverge, which would mean fewer incentives to find compromise,” says Dr. Pikulina. For example, if Republicans were heavily invested in oil and gas and coal mines, and Democrats owned all of the renewable energy, it could affect who gets tax breaks and who gets more heavily regulated.
“The main danger of going down the road is this separation of economies into blue and red. Right now, everyone wants a good economy, but it has to be the same economy for all,” she says. “But if we have two different economies, conflicts of interest are unavoidable.”
The study is the first of its kind to focus on wealthy individual investors who, as Dr. Pikulina says, “are not people you would expect to make silly financial mistakes.” Previous studies have shown that investors tend to be more optimistic and invest more heavily when their preferred party is in power, but the research shows they are also investing in different stocks.
The study focused on the United States, but Dr. Pikulina believes the effects might be found in other regions where levels of political polarization are high.
At the individual level, investors should understand that their political views could be affecting their own investment decisions — and sacrificing returns and diversification — but they should also be aware of the broader implications of splitting markets and the economy down party lines, she says.
“When people think about polarization, they often picture people shouting at each other or refusing to engage. But that's not the end of the story,” says Dr. Pikulina. “Political polarization feeds financial and economic polarization. At the end, we risk paying a high price in terms of future economic growth.”
