Study links mutual fund decisions with religion

By Laura Koran ("CNN," September 25, 2012)

Extracted from http://wwrn.org/articles/38149/

Faith plays a major role in many Americans' lives, affecting their outlook on morality, politics and even – according to a new study – investing.

The study, conducted at the University of Georgia and Southern Methodist University, found that the predominant religion in a community affects the decision-making process of mutual fund managers in that community, specifically when it comes to risk.

Mutual funds in counties with larger Catholic communities tend to embrace risk more than those in majority-Protestant counties, the study found. Earlier studies have found that Catholics are generally more prone to take speculative risks than the average population, while Protestants are more risk-averse than the average population.

The findings, which will be published next month in the academic journal Management Science, could help provoke a re-evaluation of how investing works, its authors said.

"One would expect that with very, very severe competition within the mutual fund industry, culture should play no role in mutual fund decisions because fund managers ... should adopt value-maximizing strategies," said Tao Shu, an assistant professor of finance at the University of Georgia and one of the study's authors.

"Surprisingly," Shu continued, "we found that despite the very intense competition within the mutual fund industry, mutual funds are still impacted by local culture."

Specifically, the study found that mutual funds in predominantly Catholic areas are associated with increasing fund volatility, a measure of risk taking, by about 6%. Those in predominately Protestant counties have a 14% lower fund volatility than other funds.

The study looked at 1,621 growth and aggressive growth mutual funds.

Shu conducted the study with University of Georgia colleague Eric Yeung and Johan Sulaeman of Southern Methodist University.

Howard J. "Rusty" Leonard, founder and CEO of the North Carolina-based mutual fund company Stewardship Partners, said he understands how cultural influences can play a part in investment decisions. Stewardship is one of a growing number of investment firms with religious missions, investing only in companies that he said meet specified moral standards.

Leonard said the study may speak to complex geographic trends that include religion but that also go beyond it.

"We have clients for what we do in the South and (in) other places in the country but almost none in the Northeast," he said. "And there just isn't the interest in screening and reflecting religious viewpoints in the Northeast, as much as there is in the South."

Leonard said the study seemed to speak to the greater degree of overall religious conviction in the Bible Belt, home to a higher proportion of evangelical Christians than any other region of the country.

"Churches in the South, being more conservative in nature in the first place – with the Baptist influence particularly – just make the whole cluster more conservative, and more suspicious probably of things that are promising great solutions and great returns," Leonard said.

Shu, for his part, said his findings do not suggest that investors make decisions purely based on their religion, pointing to earlier studies linking investment decisions to other cultural factors.

He also cautioned that a variety of factors can affect mutual fund performance, and investors should not make their investment decisions based on the faiths of fund managers.