Do Mutual Funds Represent Individual Investors?

Abstract

Although mutual funds have widely varying voting patterns and predictable ideological disagreements, little is known about whether their underlying investors have similar preferences or sort by ideology into funds. I provide the first systematic documentation comparing the voting preferences of individual investors in the United States to those of the mutual funds they invest in. I find that individual investors are highly ideological in their voting. Environmental, Social, and Governance (ESG) funds have an ideologically distinct shareholder base of individual investors whose preferences are reflected in the votes of the ESG funds. ESG funds are unique in this respect; although funds have distinct voting ideologies, as do individual investors, a mutual fund’s voting choices generally have little or no relationship with those of its underlying investors. Limited attention may explain why individual investors with strong ideological preferences do not choose funds with similar ideologies, other than ESG funds, despite varied options to choose from. Although an individual’s ideology significantly relates to the binary categorization of the firms or funds she owns (for example, renewable energy or fossil fuel firms or ESG funds), there is no relationship to third party social responsibility scores of firms, funds, or fund holdings. Furthermore, even excluding ESG funds, individual investors with larger investments show a strong relationship between their individual voting ideologies and those of the funds they invest in.