New research reveals big mutual funds prioritize political influence over shareholder value

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Jul 11, 2024, 11:00 ET

FONTAINEBLEAU, France, SINGAPORE and SAN FRANCISCO, July 11, 2024 /PRNewswire/ -- As the US steels itself for the election in November, the possibility of a political shift in the White House seems high. Yet a new study suggests the outcome may also lead to very different voting behaviour among the top US mutual funds as they look to switch allegiance and maintain their political influence.

This is according to new research by Massimo Massa, Professor of Finance and The Rothschild Chaired Professor of Banking at INSEAD, and his co-author Lei Zhang, Associate Professor of Finance at City University of Hong Kong, who analyzed the behaviour of US mutual funds between 2004 and 2021.

They found that voting patterns shifted significantly depending on the political party in power when it came to more political shareholder proposals. In fact, asset managers were 30.33% more likely to support stricter environmental and social proposals when Democrats held power compared to only 17.25% when Republicans were in control.

This behaviour disregarded recommendations from proxy advisors, who advise based on best financial outcomes for shareholders. Interestingly, it also seemed independent of individual fund manager beliefs. Instead, the votes appeared calculated to maximize political capital for the fund families.

The study also found that the top ten biggest mutual fund groups displayed a greater tendency to align their votes with the political majority compared to smaller funds. This suggests their size and influence translate into greater lobbying power, allowing them to further tailor their behaviour to the current political climate.

The financial markets wield immense power, and a significant portion of that power rests with the biggest mutual fund companies. BlackRock, State Street, and Vanguard, the top three asset management companies, collectively held 23% of the S&P 500 firms in 2021. This gives them an outsized role in the governance of these companies.

Large mutual funds, like BlackRock with its staggering $10 trillion in managed assets, attract significant scrutiny from regulators like the SEC and FTC. These regulatory bodies, influenced by the political party in power, have the authority to tighten or loosen regulations impacting the fund industry. It is perhaps unsurprising that mutual funds may strive to appear politically aligned with the current administration.

The authors argue that the findings of this study raise serious concerns about the priorities of major mutual funds. The potential for political influence to outweigh shareholder value demands a closer look at regulations and a push for greater transparency. Ultimately, ensuring that these financial giants prioritize the interests of their investors requires a commitment to good governance and responsible stewardship.

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SOURCE INSEAD