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BESS - The Performance of Diverse Teams: Evidence from U.S. Mutual Funds

CEU Building
Monday, November 25, 2019, 11:00 am – 12:15 pm

Emanuele Rizzo - Nova Lisboa

The Performance of Diverse Teams: Evidence from U.S. Mutual Funds

Richard Evans, Melissa Prado, Emanuele Rizzo, Rafael Zambrana

We use the U.S. mutual fund industry to study the relationship between diversity and team performance. Focusing on diversity with respect to political ideology, we find that teams of portfolio managers with different political ideologies outperform homogeneous teams by 1% per year on a risk-adjusted basis and have higher active share, tracking error and lower R2.  These results are robust to manager and family fixed effects, as well as to other dimensions of diversity (gender, ethnicity and age/experience), manager political connections and incentives.  We also find that political polarization has a strong limiting effect of diversity on performance, consistent with a reversal of the benefits of diversified perspectives when external forces negatively affect team trust and cooperation.  In assessing possible mechanisms for the observed outperformance we find evidence consistent both with improved decision-making due to the increased variety of perspectives and the associated greater creativity, as well as increased monitoring by heterogeneous team members.  Lastly, in exploring why diverse teams are not more prevalent in the industry, we find evidence that entrenched managers prefer homogeneous teams and that a restricted labor market supply of diversifing team members both play a role.”