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    How Cultural Diversity Affects Mutual Fund Risk and Investor Behavior

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    By on Business Insights
    Dr. Jin Peng, assistant professor of finance at the University of Colorado Colorado Springs College of Business, is interested in how the behaviors of mutual fund managers or CEOs affect their decision-making. Her most recent paper, “Cultural Diversity Among Money Managers and Mutual Fund Risk and Return,” was published in the European Financial Management journal.

    Dr. Jin Peng

    It explores how the cultural backgrounds of mutual fund managers can shape investment outcomes. Peng used historical data on a variety of funds and country-of-origin individualism scores among U.S. asset managers to discover that cultural diversity, as measured by country of origin, “is associated with lower future fund return and activeness, and higher equity beta” and is “unrelated to fund risk and net fund flow but positively related to the fund redemption rate.”

    The study reveals a hidden trade-off. Greater cultural diversity among fund managers correlates with their funds being considered more volatile, or higher risk related to future return estimates. However, cultural diversity does not predict funds that are actually higher risk based on the fund’s overall risk profile. Although cultural diversity among fund managers does not affect actual risk or the amount of money being invested into the fund (net fund flow), it does indicate that investors withdraw investments at a greater rate (fund redemption rates), which is an indicator of investor sentiment or confidence.

    Individualism is one of six dimensions of culture that researchers use to measure and compare societal characteristics between countries. It scores the extent to which people feel individual choices and decisions are expected.

    How independent each country feels affects how the culture and cultural identity of each nation. Here the Individualism score for each county is shown. Countries in gray do not have valid data to assess their score.

    Photo credit: www.geerthofstede.com

    “Measures of individualism are associated with an individual’s national identity and ethnicity,” Peng says. They “capture the core roots of cultural heritage” and “represent the bedrock of values shared by a large group of people over multiple generations.”
    She used the individualism trait to look at effects on fund risk and return, because “people with those high individual scores are documented to be more confident, more aggressive and more risk taking.” The U.S. has the highest individualism score (91), followed by the U.K. (89). The Netherlands is third (80) and Italy, fourth (76).

    This graph shows the 6D model of national culture traits for some of the most economically powerful countries. These traits are a rough map of the culture within each nation. In reality, there can be variations within each country and each individual.

    Peng undertook this study about mutual fund risk and returns to fill a literature gap, an area where no research has been done, exploring how background affects fund performance. She used the fund manager’s name, combined with online searching tools, to identify their most likely country of origin. The country identified was matched with the corresponding individualism score that Dutch professor and social psychologist Geert Hofstede developed.
    To quantify cultural diversity by fund‐year, Peng calculated the range and standard deviation of individualism scores of all asset managers working on each fund during the mutual fund‐year.
    Another area related to her work is “studies showing that working background or educational diversity” actually improves fund performance due to the additional information it makes available to fund managers. “But our work highlights that the type of diversity matters, and cultural value dispersion, in particular, may lead to lower fund performance instead.”
    Concerning her future projects, Peng says, “I’ve got a new set of data where we look at the facial traits of CEOs or mutual fund managers … and see how that changes their decision behaviors.”
    Peng’s analysis of her completed study’s results is that “Mutual funds with a stronger commitment to cultural diversity among managers earn lower future alpha and returns because culturally conscious investors, who derive nonmonetary payoffs from embracing multiculturalism, bid up their stock prices,” she says. “By contrast, their conservative peers who underweight cultural diversity … trade at lower stock prices, leading to relatively higher expected alpha and return.”

    📚 Key Insights

    Does cultural diversity among fund managers affect investment outcomes?

    Yes. The study found that cultural diversity among mutual fund managers is associated with lower future return estimates and higher volatility, but does not impact overall fund risk or net fund flow.

    Are diverse fund management teams more or less active?

    Less active. Teams with higher cultural diversity tend to trade less frequently, as measured by lower active share.

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