Local Religions Affect Mutual Fund Decisions

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, Shu said.

“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.