A study from University of Georgia and
Southern Methodist University found the dominant local religion—whether
Protestant or Catholic—significantly affects mutual fund behaviors.
Mutual funds headquartered in heavily
Catholic areas tend to take on more risks, while those in heavily Protestant
areas take on less, said lead author Tao Shu, assistant professor of banking
and finance in UGA’s Terry College of Business. The paper’s co-authors are Eric
Yeung of the Terry College and Johan Sulaeman of Southern Methodist University.
Evidence that the religious belief of a local culture can affect mutual funds’ risk-taking
decisions is unexpected, because this is a very competitive industry, Shu said.
“But surprisingly, a local culture’s religious beliefs still impact risk-taking
decisions,” he said.
Because mutual funds make up about
half of all institutional investments in the country, the findings have
widespread implications for how investors manage their money, Shu noted.
According to Shu, it has been widely
documented in surveys that Catholics are more tolerant than the general
population to speculative risk, and Protestants are less tolerant to
speculative risk than general population. Note that Catholic churches tend to
be tolerant of gambling, sometimes using lotteries to raise revenue for the
church, Shu said, but many Protestant congregations take a sterner stance.
Local religious beliefs can affect
mutual fund behaviors in several ways. For example, local religious beliefs can
affect a fund manager’s personal beliefs and, in turn, mutual fund behaviors,
“Additionally, people tend to choose a
place to work where the local culture is consistent with their personal beliefs,”
Shu said. “So it’s possible that Protestant and Catholic fund managers
self-select. Also, people like to invest in local stocks, so it’s possible they
will invest in local mutual funds. In this case, for example, local Catholic
investors may prefer a higher-risk strategy and pressure managers into making
those kinds of decisions.”
Yet, despite the risk-preference
differences, the end results are about the same. The risk-taking associated
with local religious beliefs does not lead to superior fund returns. The lesson
for investors, then, is to ask riskier fund managers to play it safe.
“When there is risky behavior and no
extra reward, it means there is too much risk,” Shu said.