Like living life on the edge? Try a Catholic mutual fund! A study from the University of Georgia and the Southern Methodist University has shown that the amount of risk mutual funds take corresponds to the religion of the local populous and the fund manager. Catholics are risk takers apparently.
This remarkable research was carried out as follows: Tao Shu, Eric Yeung, and Johan Sulaeman first mapped the headquarters of mutual funds. Then, they compared this to information about the religious colour of that specific region. The results? Funds that have their headquarters in countries that are mainly Catholic have more volatile returns than those that are located in Protestant regions.
To confirm their findings, the researchers also investigated the religion of the areas where the fund managers went to college. This verified their research; the more Catholic the county, the more volatile the fund. According to the researchers, this study shows that Catholic culture has less problems with investment risk than Protestant culture. In addition, it indicated that fund managers can be influenced by local culture.
The researchers write: ‘Despite the large body of literature on [the] mutual fund industry, the effects of local culture on mutual funds' investment decisions have never been explored. Local culture can exert a non-negligible impact on mutual fund investments for several reasons. Fund managers and employees are likely to conform to the norms in local culture, as social identity theories...suggest that the value in sharing an identity and having a sense of being in a particular group has substantial influence on people's behaviors.’
As stated before, the culture of the counties in which the managers attended college is important as well: ‘School-location religiosity ratios likely capture the managers' religious beliefs, primarily because a person with certain religious belief is likely to choose a school where the culture is consistent with the religious belief of herself, her family, or her hometown.’ In addition, the researchers write, a person’s beliefs can also be influenced by the local culture in a school.
1,621 mutual funds were analysed in the study. The investigated funds were both growth and aggressive-growth equity mutual funds and were studied between 1988 and 2008. The researchers also found out that the concentration of funds corresponds to religion: funds in Catholic counties often had fewer holdings in their portfolios. This contributes to the higher risk they take as the lesser holdings there are in a portfolio, the higher the impact of one specific stock item. According to the study, ‘mutual funds' tournament risk-taking behavior—i.e., losers at the midyear take more risk in the second half of the year—only exists for funds in low-Protestant (or high-Catholic) counties.’
The researchers concluded with the fact that fund managers are not influenced by local culture on a micro, but on a macro level: ‘[W]e find no differences in [funds'] holdings of individual risky stocks, suggesting that the effects of religiosity ratios on risk-taking are at the portfolio level instead of the individual stock level.’ However, the research ends with a warning: ‘the higher return volatilities of funds in counties with [a] lower Protestant population or higher Catholic population are not rewarded by higher returns.’