Investors in the U.S. are less likely to invest in mutual funds that have managers with foreign-sounding names, according to a new study from the University of Miami School of Business Administration.
The study, forthcoming in The Review of Financial Studies, found that annual fund flows were 10% lower for funds managed by someone with a foreign sounding name compared to funds managed by someone with a more familiar American name, an annual loss of approximately $133,000 per $195 million under management.
The study also found:
- These effects are stronger for funds that have more conservative investor clienteles or are located in regions where racial/ethnic stereotypes are more pronounced. The impact occurs even though managers with foreign-sounding names do not follow unique investment styles or have inferior investment skills. On the contrary, individuals who live in regions with a greater proportion of foreign-born individuals invest more in funds run with foreign sounding names.
- Funds with foreign-named managers receive lower inflows after good performance and they experience relatively more outflows after bad performance. In other words, managers with foreign sounding names are rewarded less for good performance and "punished" more for bad performance.
- Among the best performing funds in the 80th percentile of the performance missed out on $318,432 in advisory fees. For extreme out-performers, the loss of compensation can get even worse, climbing to almost $700,000 in lost fees.
- After the Boston Marathon Bombings and 9/11 terrorist attacks, trust in foreign names saw a significant drop.
"We know that people consciously or sub-consciously assign attributes to a person when they hear their name – President Obama said it well when he joked that he got his middle name, Hussein, from someone who clearly didn't know he'd ever run for president," said Alok Kumar, Gabelli Asset Management Professor of Finance at the University School of Business Administration and the leader researcher.
"Our study suggests that if Barack Obama was a fund manager his name could cost his fund more than $100,000 this year," added Kumar, whose research partners included Alexandra Niessen-Ruenzi of the University of Mannheim and Oliver Spalt of Tilburg University.