What Is In A Name? Mutual Fund Flows When Managers Have Foreign-Sounding Names
University of Miami – School of Business Administration
University of Mannheim – Department of Finance
Oliver G. Spalt
Tilburg University – Department of Finance
Abstract:
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 more likely to be suspicious of foreigners. Foreign-name managers experience lower appreciation (greater decline) in flows following good (bad) performance. Following 9/11, flows to funds with managers with Middle-Eastern sounding names decline abnormally. In an experimental setting where skill differences are absent, individuals allocate 11% less money to an index fund managed by a foreign-name manager. This gap widens following the Boston marathon bombings.
What Is In A Name? Mutual Fund Flows When Managers Have Foreign-Sounding Names – Introduction
And I got my middle name from somebody who obviously didn’t think I’d ever run for president. – Barack Hussein Obama, Al Smith Dinner, New York, October 16, 2008.
When people hear the name of a person, either consciously or sub-consciously they typically assign a host of attributes to that person, which are related to the “group” (i.e., country of origin, religion, ethnicity, culture, etc.) associated with the name. Often, name-related stereotypes get activated almost spontaneously without much conscious effort (Kunda (1999)). These stereotypes consequently may color the initial impressions of the person. For example, names such as “Zaheer Sitabjhan” or “Toshihiko Tsuyusaki” are likely to invoke a different reaction than typical American names like “Michael Brown” or “Robert Stevens”.
One of the main reasons for this different perception is that a person with a less familiar, foreign-sounding name may trigger a strong sense of in-group bias. People systematically adopt favorable opinions about members of their own group and might be indifferent or have lower opinions about members who are outside of their group (e.g., Tajfel (1982), Hewstone, Rubin, and Willis (2002)). As a result, out-of-group individuals may be trusted less, could undergo closer scrutiny, and may even experience some form of discrimination. If these biases take an extreme form, they may generate emotions of fear or hostility and even induce xenophobic feelings (e.g., Allport (1954)).
Using a field experiment in which names are randomly assigned to resumes, Bertrand and Mullainathan (2004) show that employers discriminate against candidates based on their name. Individuals with names such as “Lakisha” and “Jamal” that are distinctively African-American are less likely to be invited for a job interview. While in that study there are no differences among candidates’ resumes (by design), it is still possible that names proxy for unobservable differences in productivity.1 Because job productivity is largely unobservable, it is very hard to distinguish between social bias induced taste-based discrimination and pure statistical discrimination in most labor market settings.
In this paper, we analyze whether potential stereotypes associated with a person’s name affect the investment choices of mutual fund investors. Specifically, we examine whether investors are less likely to invest in mutual funds that are managed by individuals with foreign-sounding names. The mutual fund setting is particularly attractive for studying social bias because fund management is one of the very few occupations where good measures of job performance are available. In particular, the performance of fund managers is observable from fund returns, which allows us to overcome challenges in the prior literature where it has been difficult to account for productivity differences that might be correlated with observable individual attributes.
Our key conjecture is that funds managed by individuals with foreign-sounding names would have lower fund flows even if managers of those funds do not have inferior investment skill. In addition, those managers may be “punished” more after bad performance and “rewarded” less after good past performance, i.e., compared to funds managed by individuals with non-foreign-sounding names, flows would decline more following poor performance and may appreciate less following good performance. We also posit that name-induced stereotypes are likely to be stronger among individuals who are more suspicious of foreigners. Consequently, name-induced flow patterns would be stronger for mutual funds that have a higher fraction of these individuals as investors.
We test our conjectures using a novel, hand-collected dataset that contains measures of foreignness of a large sample of mutual fund managers from the perspective of a U.S. resident. We are not particularly interested in identifying fund managers who are U.S. citizens and those who are foreigners. What we want to capture is whether a name sounds foreign when heard, read in a fund prospectus, or found on a mutual fund web site. Since information on nationality is rarely disclosed, the name of the fund manager is the only personal information that is available to most investors. The perceived foreignness of a name might trigger social biases and influence the investment decisions of mutual fund investors. For brevity, we refer to funds managed by individuals with foreign-sounding names as foreign funds.
One of our key findings is that flows in funds managed by individuals with foreign-sounding names are around 10 percentage points lower, compared with funds managed by individuals with typical American names. Further, compared to 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. 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.
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