Keep your politics out of your investments

Investors must not let their political beliefs influence their investment choices, despite the common perception. ESG (Environmental, Social, and Governance) investing, which excludes certain industries from a portfolio, is a misguided approach, just as conservative investors who refuse to invest in clean energy companies because they deny climate change are also misguided.

Even the most skilled investors working at hedge funds fail to follow this rule. A study from Singapore Management University analyzed the holdings of US hedge funds and compared their performance with the economic policies of the current US President. The study measured the impact of economic policy announcements on the stock prices of every US company, which in turn indicated the sensitivity of each hedge fund to these announcements.

The findings revealed that hedge funds with political alignment to the President's policies and portfolios that adhered to the President's economic policies underperformed by approximately 4.4% annually compared to those with less alignment. This implies that the information about the President's policies is already incorporated into the stock prices.

Meanwhile, stocks that did not benefit from the President's policies were avoided by investors, leading to higher future returns. The study also examines the effects of unanticipated events that increase political polarization, such as mass shootings and protests in cities where hedge funds are based. After these events, hedge fund portfolios that were already aligned with the President's policies became even more aligned, resulting in further underperformance.