The partisan portfolio divide
We seem to live in a world where everything is becoming politicized. I have written before about how people of different political persuasion not only follow different news sources but buy different products. I make no secret of my belief that culture wars and political polarisation are incredibly dangerous and damaging for our society. But a new analysis by Yihui Pan and colleagues indicates that it definitely becomes dangerous to our investments.
By looking at the investment portfolios of Americans in different counties across the US, they compared the average investment portfolio of people living in a Democratic-voting county with that of people living in a Republican-voting county. The chart below shows how historically there was no statistically significant difference between portfolios in different counties. But since 2013, the difference has increased substantially.
Portfolio distance between Republican and Democrat investors
Source: Pan et al. (2023)
Why is that? After all, political polarisation has been widening in the US since the 1990s. What changed in the last ten years? The research indicates that it is the rise of conservative media that drives this polarisation in investment portfolios. Every time the Sinclair Broadcasting Corporation – a conservative radio broadcasting company – took over a local radio station, the polarisation in the portfolios of investors started to increase. The culture war issues debated on Sinclair stations and the different kinds of commercials run on those stations influenced the investment behaviour of listeners.
Today, investors in Republican counties avoid stocks of companies with Democrat CEOs while investors in Democrat counties avoid investments in companies that are damaging to the environment or that are criticised for their labour practices. The result is that investors in Republican counties invest more heavily in oil & gas and mining companies, while investors in Democratic counties invest more heavily in tech companies.
Personally, I don’t know whether tech stocks will outperform oil & gas stocks going forward or the other way around, but what the last 15 years have shown is that by tilting portfolios away from one sector or another based on political views, at least one group of investors is likely to have lower returns in the long run. And while suffering lower returns can happen to all of us and should not be a cause for embarrassment, suffering lower returns because of your political views is simply stupid.
But is it stupid to try to invest ethically, even if it means losing, say, 1% CAGR?
(I'm not that kind of guy -- I'd even buy MO if it were a good investment. But I appreciate it when folks try to support good causes. That said, ESG is mostly BS).
The seeds of the US conservative media (beginning with Bill Buckley and then later, Rush Limbaugh) were cultivated in a progressively liberal soil. If the mainstream media had not grown outside the bounds of somewhat fair treatment, the conservative response likely never occurs. Conservative media’s growth filled a vacuum in the thought-sphere.