October 2024
Executive Summary
In today’s polarized climate, partisan politics pose a major challenge for investors, especially around elections. We identify “Democratic” and “Republican” stocks based on their political contributions. While such contributions generally represent profitable “investments in influence,” highly partisan donations, particularly from executives, have generated limited shareholder returns. In contrast, “nonpartisan stocks,” which invest in diversified portfolios of candidates from both parties, have delivered excess returns with lower political risk.
Election Risk
Political Polarization 🧲
With the U.S. presidential election only two weeks away, many investors are concerned about how a Trump or Harris administration might affect their portfolios. In an extremely close race, however, the outcome is essentially a coin toss.
Unfortunately, this coin toss may prove especially impactful for investors due to the two candidates’ sharply diverging ideologies. According to the JPMorgan analysis below, if elected, Harris or Trump would be the most liberal or conservative U.S. president of the past century, respectively.
Exhibit 1
Widening Political Gap
Source: VoteView, JPMorgan. See full footnotes in JPMorgan paper. As of 9/30/2024.
The candidates’ ideological divide leads to starkly divergent views on key economic policy areas, such as foreign trade, taxation, immigration, and regulation. This creates massive uncertainty for investors, with implications for all sectors of the economy, ranging from Big Tech to health care.
However, political polarization is not specific to these two candidates or even politicians in general. Over the past few decades, the entire U.S. electorate has become more and more partisan, with liberals and conservatives increasingly unable to find common ground.
Exhibit 2
Death of the Moderate
Source: Pew Research Center.
Democratic and Republican Stocks 🇺🇲
In this extremely politicized environment, stocks are now increasingly considered “Democratic” or “Republican.”
The most obvious example is “Trump Media & Technology Group” (DJT), effectively a meme stock. However, almost every firm has some degree of exposure to partisan politics. In the exhibit below, we classify Republican and Democratic stocks based on their political contributions.
Exhibit 3
Trump and Harris Stocks
Source: FEC, Sparkline. For illustrative purposes only. See full methodology in paper. Data is for the 2024 election cycle using data available as of 10/15/2024.
The classifications are intuitive. Oil and gas companies tend to favor Republicans, while the renewable energy sector supports Democrats. Big Tech is overwhelmingly liberal, while materials and financials lean conservative.
This partisan divide reflects differing stances not only on social but also economic issues. Firms rationally tend to support candidates favorable to their commercial interests. As we show later, these partisan stocks respond as expected to the changing odds of a Trump or Harris victory.
Follow the Money
Government for Sale 🏛️
While inflation in the prices of consumer goods and services is a contentious electoral issue, perhaps the most insidious inflation is in the cost of elections themselves. Elections have become increasingly expensive and are set to reach an all-time high this election cycle!
Exhibit 4
Electoral Price Inflation
Source: OpenSecrets, Sparkline. Update of an exhibit originally published in Investing in Influence (Nov 2022). 2024 projected based on data available as of 10/15/2024.
In Investing in Influence (Nov 2022), we showed how Federal Election Commission (FEC) data can help us track the flow of contributions to candidates. In the next exhibit, we highlight Timothy Mellon, whose $150+ million in contributions make him the largest individual donor so far this election cycle.
Exhibit 5
Timothy Mellon’s Political Contributions
Source: FEC, Sparkline. For illustrative purposes only. For visual clarity, we exclude a $10 million contribution to the Congressional Leadership Fund, which is spread over 100+ candidates. Parentheses indicate whether donation was to support or oppose the candidate. Data for 2024 election cycle as of 10/15/2024.
While some donations go directly to candidates, others flow through “political action committees” (PACs). PACs can be organized by corporations, labor unions, industry groups, or independent organizations. PACs must disclose spending targeting specific candidates, both in support or opposition. In our analysis, we “look through” these PAC intermediaries, allocating donations pro rata to their ultimate beneficiaries.
We identify three types of corporate contributions. First, firms can contribute directly from their treasuries. Second, they can sponsor “corporate PACs,” which bundle employee contributions and direct them to candidates and other PACs. Third, we give firms credit for self-directed donations from their employees; we assume politicians still feel beholden to the employers responsible for their donors’ livelihoods.
The next exhibit shows the breakdown for U.S. public companies. We split employee-directed contributions into those from executives (e.g., CEOs) and ordinary employees.
Exhibit 6
Political Contributions by Source
Source: FEC, S&P, Sparkline. Universe is the largest 1,000 U.S. stocks by market capitalization. Executives are defined as C-Level, VPs or Presidents. Contributions are summed over the period from 2004 to 2024. As of 10/15/2024.
Of these contributions we have mapped to public firms, 39% are corporate-directed and 61% are employee-directed. Employee donations are split evenly between executives and ordinary employees, while corporate donations mostly come from corporate PACs rather than treasuries.
The next exhibit shows the publicly-traded firms that have made the largest donations so far in the 2024 election cycle.
Exhibit 7
Top Corporate Donors
Source: FEC, Sparkline. Highest overall corporate donors from a universe of the 1,000 largest U.S. public companies. Update of an exhibit originally published in Investing in Influence (Nov 2022). Data for 2024 election cycle as of 10/15/2024.
Tesla and Coinbase sit atop the league table, due to massive contributions from Tesla’s CEO Elon Musk and Coinbase’s treasury to the America and Fairshake PACs, respectively (discussed later). Three financial firms also make the list due to the largess of their billionaire executives (e.g., Blackstone). However, we also find firms whose political influence stems from hundreds of small donations, either self-directed or bundled by corporate PACs (e.g., Boeing, Amazon).
Partisan Stocks ⚔️
Next, we compute the share of each firm’s contributions to Democratic and Republican candidates. Let’s start with the example of Google. The next exhibit shows the flow of donations from the firm and its employees to its top 24 candidate recipients. We also illustrate if funds flow directly to candidates or indirectly via intermediate PACs.
Exhibit 8
Google’s Political Contributions
Source: FEC, Sparkline. For illustrative purposes only. Shows Google’s contributions to its 24 largest recipients. Data for 2024 election cycle as of 10/15/2024.
First of all, we find that Google’s political contributions are nearly all employee-directed (89% of total). Furthermore, its employees, both executive and non-executive, are almost uniformly Democrats (86% of total). While its corporate PAC is more bipartisan, it is tiny by comparison.
In the next exhibit, we repeat this analysis for the rest of the so-called “Magnificent Seven” (i.e., Big Tech stocks).
Exhibit 9
Magnificent Seven Political Contributions
Source: FEC, Sparkline. Data for 2024 election cycle as of 10/15/2024.
Google is not alone in favoring the Democratic party. Apple, Nvidia, Meta, Amazon and, to a lesser extent, Microsoft are all also partisan Democrats. Tesla stands out as the clear outlier due to its CEO Elon Musk’s $75+ million donation to Trump and other conservative causes (more on this later).
Next, let’s zoom out beyond the Magnificent Seven. In the following exhibit, we repeat this analysis for large-cap stocks from across the political spectrum.
Exhibit 10
Corporate Donors by Partisan Share
Source: FEC, Sparkline. Data for 2024 election cycle as of 10/15/2024.
On the Democratic side, we find that Netflix is even more uniformly liberal than Google. Ford, which was neutral in the 2022 election, has swung to the left. Aerospace and defense firms Boeing, American Airlines, and General Dynamics now hold down the bipartisan center. On the right, we find Eli Lilly, Amgen, Phillips 66, and Interactive Brokers.
As noted earlier, certain industries tend to favor one party or the other. We confirm this in the next exhibit, which computes partisan donation share at the industry level.
Exhibit 11
Industry Partisanship
Source: FEC, S&P, Sparkline. Update of an exhibit originally published in Investing in Influence (Nov 2022). Autos excluded. Data for 2024 election cycle as of 10/15/2024.
Technology, media, and household product companies favor Democrats. Conversely, energy, materials, and utilities support Republicans, as do food, beverage, and tobacco. Financials, health care, and services are more bipartisan, supporting the two parties relatively equally.
That said, significant firm-level variance also exists within industries. The next exhibit highlights some examples.
Exhibit 12
Partisan Dispersion by Industry
Source: FEC, S&P, Sparkline. For illustrative purposes only. Data for 2024 election cycle as of 10/15/2024.
Within the capital markets industry, BlackRock has earned a reputation as a champion of “woke capitalism,” while Interactive Brokers’ CEO is a long-time Republican donor. Within retail, Tractor Supply sells to the rugged, rural consumer, while Zumiez caters to younger, suburban buyers.
Party affiliation is also related to geography. The next exhibit shows the political bias of each state based on the location of company headquarters.
Exhibit 13
Geographic Partisanship
Source: FEC, Sparkline. We aggregate total political contributions from publicly-traded U.S. stocks to the two parties. Shading is proportional to Democratic - Republican (% of Total Donations). Update of an exhibit originally published in Investing in Influence (Nov 2022). Data for 2024 election cycle as of 10/15/2024.
As expected, the west coast is liberal, while the midwest and south are conservative. Interestingly, the northeast actually leans slightly Republican. This marks a shift from the 2022 midterm, when the northeast was slightly Democratic. On the other hand, Michigan now leans Democratic, due to the leftward shift in the Detroit auto industry mentioned earlier.
As discussed in Intangible Value: A Sixth Factor (May 2023), investors often decompose their portfolio risk into “factors,” most notably size, value, and quality. The next exhibit examines partisanship from a factor lens.
Exhibit 14
Factor Partisanship
Source: FEC, S&P, Sparkline. Universe consists of the top 1,000 U.S. stocks by market capitalization. Partisan stocks defined based on 2024 election cycle. As of 10/15/2024.
Democratic stocks tend to be large-cap growth stocks, given their overweight to Big Tech. Conversely, Republican stocks tend to be small-cap value stocks. While Republican stocks offer better value than Democratic ones, they have worse quality exposure (i.e., return on equity of “only” 14.1%).
Most investors do not hold concentrated portfolios of just a few stocks. Instead, they buy exchange-traded funds (ETFs) that own broadly diversified portfolios of stocks. The next exhibit shows the partisan exposure of popular ETFs.
Exhibit 15
ETF Partisan Exposure
Source: FEC, S&P, SSGA, iShares, Invesco, Sparkline. Partisan stocks defined based on 2024 election cycle. Not a recommendation to buy or sell. As of 10/15/2024.
The S&P 500 is heavily tilted toward Democratic stocks. This is because its market-cap weighting scheme means placing a lot of weight in left-leaning Big Tech stocks. The S&P 500 Equal Weight ETF, which doesn’t follow this cap-weighting scheme, is more politically balanced.
Meanwhile, the Nasdaq 100 and Russell 1000 Growth ETFs, which hold a lot of tech stocks, are even more exposed to Democratic stocks than the S&P 500. On the other hand, the Russell 1000 Value ETF is more politically neutral. As we saw earlier, the value factor is Republican, providing a counter-balance to the liberal bias of cap-weighted indices.
Partisan Stock Returns 📈
Should investors prefer to hold Democratic or Republican stocks? The next exhibit shows the historical returns of Democratic relative to Republican stocks.
Exhibit 16
Democratic vs. Republican Stock Returns
Source: FEC, S&P, Sparkline. Democratic stocks are those for which the Democratic share of total donations is in the top 50th percentile of firms making more donations to Democrats than Republicans. Republican stocks are the same but for Republicans. We exclude firms below the 50th percentile of total donations. Portfolio is rebalanced based on the U.S. election cycle. Universe is the largest 1,000 U.S. stocks by market capitalization. Update of an exhibit originally published in Investing in Influence (Nov 2022). Excludes transaction and financing costs. See important backtest disclosure below. As of 9/30/2024.
Over the long run, the returns of Democratic and Republican stocks have been mean-reverting; no systematic advantage exists for investing exclusively in the stocks of either party.
That said, these stocks can still exhibit large, multi-year deviations, mostly reflecting the industry and factor exposures seen earlier. Democratic large-cap, growth, and tech stocks outperformed in the expansion phases of the dot-com and Covid bubbles, while Republican small-cap, financial, and resource stocks outperformed in the period leading up to the 2008 Financial Crisis.
In theory, the relative returns of Democratic and Republican stocks should reflect the shifting balance of power in D.C. The next exhibit shows two sources of real-time forecasts for the 2024 election. RealClearPolitics produces a composite of traditional polling data (e.g., CBS, Pew), while Polymarket provides odds implied by prediction market traders.
Exhibit 17
2024 Presidential Election Odds
Source: Polymarket, RealClearPolitics, Sparkline. As of 10/21/2024.
The two sources are highly correlated, but not perfectly. This is expected, as they quote in different units of measurement (i.e., favorability spread vs. win probability), with one tied to the popular vote and the other to the Electoral College. Rather than wade into the contentious debate over the relative merits of prediction markets vs. polls, we’ll just consider both sources.
In the exhibit below, we show how changes in Trump’s election odds, based on RealClearPolitics and Polymarket, relate to subsequent Trump vs. Harris stock returns.
Exhibit 18
Trump Stocks Rise With Election Odds
Source: FEC, S&P, Polymarket, RealClearPolitics, Sparkline. RCP and Polymarket are 15-day differences. Stock returns are for the subsequent 15-days. Polymarket is scaled by 0.2. Partisan stocks defined based on 2024 election cycle. Excludes transaction and financing costs. See important backtest disclosure below. As of 10/21/2024.
While only a short time period, we find a strong 77 to 88% correlation between increases in Trump’s election odds and subsequent Trump stock outperformance. After Biden’s poor debate performance, Trump's odds began to climb. This was followed by a rally in Republican stocks. However, after Biden dropped out and Harris gained momentum, the so-called “Trump trade” lost steam.
Interestingly, changes in polling and prediction market odds appear to affect stock returns with a lag. Political data contains relevant information on the value of partisan stocks but only filters into the stock market with a delay. This implies not only a violation of market efficiency but also a potential arbitrage opportunity. 🤔
Return on Influence
Elon vs. Crypto 🚀🪙
“If you don't have a seat at the table, you're probably on the menu.”
🍽️ Anonymous Political Proverb
In Investing in Influence (Nov 2022), we showed that firms investing in political influence in the form of campaign donations tend to outperform the stock market. However, there are many ways to direct a dollar of such investment. What yields the highest return for shareholders?
At a high level, there are two contrasting strategies. At one extreme, donors can support a single party or candidate. Most notably, Elon Musk, the world’s richest person (and former moderate Democrat), has gone “all in” on Trump. Musk’s America PAC, created only five months ago, has already spent $118 million, nearly all to support Trump’s presidential bid.
In addition to his financial support, Musk has made large “in-kind” contributions to Trump. Since declaring for Trump, he has broadcast a steady stream of pro-Trump posts to his 200 million followers on X, the social network he owns, and has even been hitting the campaign trail for Trump.
Exhibit 19
Jump for Trump!
Source: New York Times.
At the other extreme, one can play both sides. Perhaps the best current example is the Fairshake PAC, which has raised over $160 million to represent the crypto industry. Most of these funds come directly from the treasuries of crypto-related firms like Coinbase, Ripple, and a16z.
Fairshake is interesting not only for the sheer size of its war chest but also for the nonpartisan way it has been deploying it. So far, it has spent $67 million supporting Republican pro-crypto candidates and $47 million backing Democratic ones. It has also spent $14 million to oppose anti-crypto candidates, all of whom happen to be Democrats.
Unlike Musk, Fairshake has stayed out of the presidential election, focusing only on congressional races. Fairshake’s approach has been strategic, targeting lawmakers in close races with strong crypto views. This sophistication marks an improvement from 2022, when the industry’s “government relations” effort was co-opted by Sam Bankman-Fried, who sent over $40 million to Democrats before heading to jail.
Exhibit 20
Fairshake PAC Top Recipients
Source: FEC, Follow the Crypto, Sparkline. As of 10/15/2024.
Both the crypto industry and Elon Musk, by way of Tesla, X, and SpaceX, have faced regulatory and political challenges under the Biden-Harris administration. However, with the 2024 election providing an opportunity to mount a political response, they have opted for virtually opposite strategies.
Will Elon’s big bet on Trump or Fairshake’s bipartisan, down-ballot strategy better advance their respective interests? While we cannot predict the outcome of the upcoming 2024 election, we can assess the expected value of these two strategies based on their average efficacy as applied by hundreds of other firms in past election cycles.
Nonpartisan Investing ⚖️
“The mixing of politics and business not only is detrimental to politics, as is frequently observed, but even much more so to business.”
🇦🇹Ludwig von Mises
Let’s start by studying the historical returns of partisan and nonpartisan stocks. In this analysis, partisan stocks are those with a high share of donations to either Democrats or Republican candidates. In contrast, nonpartisan stocks are more balanced in their support of both parties.
We present two strategies. Every two-year election cycle, we build nonpartisan and partisan stock portfolios based on trailing political contributions, considering only stocks with a meaningful quantity of total donations. The next exhibit shows the returns of these two strategies relative to those of the broader U.S. stock market.
Exhibit 21
Nonpartisan Investing Outperforms
Source: FEC, S&P, Sparkline. Partisan stocks consist of the union of Democratic and Republican stocks as defined earlier. Nonpartisan stocks are all other stocks. We exclude firms below the 50th percentile of total donations. Portfolio is rebalanced based on the U.S. election cycle. Universe is the largest 1,000 U.S. stocks by market capitalization. Excludes transaction and financing costs. See important backtest disclosure below. As of 9/30/2024.
Since 1997, both strategies have outperformed the broader market. As we showed in Investing in Influence (Nov 2022), political influence is an undervalued intangible asset leading to subsequent excess returns. Importantly, however, we find that the outperformance of partisan stocks is considerably less pronounced than that of nonpartisan stocks.
Why might this be? First, partisan contributions are more likely to be ideologically-driven, motivated by social views and other factors aside from maximizing financial returns. This is not to say that these other issues are not important, just that they are less likely to directly affect the bottom line.
Second, partisan donations may be a sign of an excessively partisan work culture. Fos et al (2022) find that increased partisanship in executive teams can lead to the ostracization and departure of politically misaligned executives. Political homogeneity may foster harmful groupthink and invite unwelcome controversy (e.g., Google’s so-called “Woke AI”).
So what do the stocks in the outperforming nonpartisan strategy look like? The next exhibit shows a few examples.
Exhibit 22
Nonpartisan Corporate Donors
Source: FEC, Sparkline. Data for 2024 election cycle as of 10/15/2024.
Companies that take a hedged approach toward investing in influence include large defense contractors, airlines, banks, telecoms, and pharmaceutical companies. Firms in highly regulated sectors cannot afford to risk backing the wrong political horse. Most of these big corporations also invest heavily in lobbying and organizing their own corporate PACs.
Next, let’s study the risk of nonpartisan stocks. All else equal, we expect nonpartisan stocks to be less risky than their partisan counterparts, since their exposure to “political shocks” is more hedged. We test this in the following exhibit, which shows the rolling 250-day volatility of nonpartisan vs. partisan stocks.
Exhibit 23
Nonpartisan Stocks Are Less Volatile
Source: FEC, S&P, Sparkline. Rolling 250-day average volatility of nonpartisan stocks divided by partisan stocks. See important backtest disclosure below. As of 9/30/2024.
This exhibit shows the impact of rising political polarization. In 1997, the volatility of nonpartisan and partisan stocks was roughly equal. However, nonpartisan stocks have become relatively less volatile over time. Today, nonpartisan stocks are around 20% less volatile than partisan stocks.
Christensen et al (2021) obtain a similar result, finding that “political hedging” is associated with lower volatility in not only stock returns but also investment levels, tax rates, and earnings. Moreover, they find that the benefits of volatility reduction are particularly pronounced in periods of elevated policy uncertainty (e.g., elections).
Nonpartisan stocks appear to offer the dual benefit of higher return and lower risk. To be clear, these companies are not “apolitical,” abstaining from the political process. On the contrary, they are highly proactive in ensuring they have “a seat at the table.” That said, they do not let partisan politics get in the way of their business objectives.
Corporations, Executives, and Workers 🏭
A second crucial difference between the Musk and Fairshake strategies is the person or entity directing the funds. In one case, the donations are driven by an individual executive; in the other case, they are directed by a consortium of firms.
Let’s create two more strategies. First, we’ll build an index of companies whose contributions are mainly directed by the corporation itself. Second, we’ll study companies whose contributions are mainly directed by individual employees. The next exhibit shows the returns of these two strategies relative to those of the broader U.S. stock market.
Exhibit 24
Corporate Contributions Outperform
Source: FEC, S&P, Sparkline. Corporate stocks are those for which the corporate share of total donations is in the top 75th percentile. Employee stocks are the same but for employees. We exclude firms below the 50th percentile of total donations. Portfolio is rebalanced based on the U.S. election cycle. Universe is the largest 1,000 U.S. stocks by market capitalization. Excludes transaction and financing costs. See important backtest disclosure below. As of 9/30/2024.
Corporate-directed donations deliver a much greater return to equity owners than do employee-directed donations. Corporations are likely more strategic in allocating resources to candidates that represent the interests of the firm and its shareholders. Moreover, corporate donations more explicitly mention the firm name, increasing its visibility to politicians.
Of course, Musk is no ordinary employee. He is a business celebrity, as well as the CEO and principal owner of several major companies. In the next exhibit, we separate the impact of employee donations from executives (e.g., CEO, CFO) and ordinary employees. As before, we look at returns relative to the market.
Exhibit 25
Executive Contributions Underperfom
Source: FEC, S&P, Sparkline. Executive stocks are those for which the executive employee (e.g., CEO, CFO, VP) share of total donations is in the top 75th percentile. Ordinary Employee stocks are the same but for non-executive employees. We exclude firms below the 50th percentile of total donations. Portfolio is rebalanced based on the U.S. election cycle. Universe is the largest 1,000 U.S. stocks by market capitalization. Excludes transaction and financing costs. See important backtest disclosure below. As of 9/30/2024.
We find that executive donations have not, on average, benefited shareholders. In many cases, these donations may be driven more by executives’ personal career and political ambitions than the interests of their firms (e.g., future cabinet appointments, personal political influence).
Less cynically, politicians may simply be more responsive to the interests of hundreds of small donors rather than those of a single large one. Despite all the money in politics, elections are ultimately vote-weighted, not dollar-weighted.
So far, we have identified three sources of corporate political donations: the corporation itself, its executives, and its ordinary employees. The next exhibit presents examples of companies where each source makes up the vast majority of that firm’s total donations.
Exhibit 26
Corporate Donors by Source
Source: FEC, Sparkline. Data for 2024 election cycle as of 10/15/2024.
This exhibit highlights a diverse range of companies. Among corporate-driven donors, we see Coinbase followed by firms with large corporate PACs, such as Valero and CSX. Among executive-driven donors, Tesla and Interactive Brokers are the most extreme, while among ordinary employee-driven donors, we find large tech firms like Nvidia and Salesforce.
The next exhibit further decomposes these three types of firms by political party (using the definitions from earlier).
Exhibit 27
Partisanship by Source
Source: FEC, Sparkline. For each group of companies, shows the percentage classified as Democratic, Neutral or Republican. Data for 2024 election cycle as of 10/15/2024.
The three groups exhibit intuitive partisan alignments. Corporate donors tend to be Republican or nonpartisan, while ordinary employees tend to be Democratic or nonpartisan. Executives display the most bimodal partisan distribution, with a notable Republican lean (n.b., a brand new paper by Steel (2024) explores this further).
Finally, let’s break down which types of donors are most important for each industry.
Exhibit 28
Industry Political Donations by Source
Source: FEC, S&P, Sparkline. For each industry, shows the percentage whose donations are mainly sourced from the corporation, its executives, or its ordinary employees.. Data for 2024 election cycle as of 10/15/2024.
Energy, materials, and health care firms rely most heavily on corporate donors; real estate, utilities, and consumer staples firms depend primarily on executive donors; and technology, communications, and financials rely most on non-executive employee donors, likely due to the high compensation in these fields (e.g., engineers, bankers).
Diversified Portfolios 🪺
"Portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it."
🏰 Warren Buffett (1993)
We have argued that electoral contributions represent “investments” in political influence. As such, it follows that donors can build “portfolios of candidates” using similar principles to those investors use to build portfolios of stocks.
One frequent debate amongst stock investors is the tradeoff between diversification and concentration. Quantitative investors and academics tend to favor portfolios diversified across many small positions, while discretionary investors, such as Warren Buffett, often prefer to concentrate in a few high-conviction bets.
In politics, Elon Musk is following an extreme version of Buffett’s concentration philosophy; his political portfolio basically consists of a single candidate, Trump. On the other hand, Fairshake has adopted a more classical investment approach, spreading its bets across dozens of candidates.
We can visualize this difference in the next exhibit, which compares the “candidate portfolios” of the Fairshake PAC and America PAC. For each of the two candidate portfolios, we calculate a portfolio concentration score based on the “Herfindahl-Hirschman Index” (HHI).
Exhibit 29
Crypto vs. Elon Political Portfolios
Source: FEC, Sparkline. Concentration score is calculated using the Herfindahl-Hirschman Index. As of 10/15/2024.
Musk’s America PAC has 89% of its money backing Trump, with the balance in a smattering of congressional races. The concentration score of this portfolio is quite high at 79% (out of 100% max). The Fairshake PAC is more diversified, with its top three positions comprising less than half of its portfolio. As a result, its concentration score is a much lower 12%.
Next, we repeat this portfolio concentration calculation for each stock in each election cycle. We build two strategies: one of stocks with diversified candidate portfolios and another of stocks with concentrated candidate portfolios. As before, we rebalance every election cycle and report returns relative to those of the market.
Exhibit 30
Diversified Candidate Portfolios Outperform
Source: FEC, S&P, Sparkline. We define the Herfindahl-Hirschman Index (HHI) for each firm based on the share of its donations to various candidates. Diversified stocks are those with an HHI in the bottom 25th percentile. Concentrated stocks are those with an HHI in the top 75th percentile. We exclude firms below the 50th percentile of total donations. Portfolio is rebalanced based on the U.S. election cycle. Universe is the largest 1,000 U.S. stocks by market capitalization. Excludes transaction and financing costs. See important backtest disclosure below. As of 9/30/2024.
Since 1997, firms with diversified portfolios of candidates outperformed those with concentrated ones. Spreading one's political bets across many candidates has produced significant excess returns for shareholders. On the other hand, the strategy of concentrating on a few big bets has failed to create firm value, at least on average.
The next exhibit shows some current holdings of the outperforming diversified portfolio strategy.
Exhibit 31
Diversified Corporate Donors
Source: FEC, Sparkline. Data for 2024 election cycle as of 10/15/2024.
We find many of the usual suspects from earlier, such as RTX, Eli Lilly, and CSX. It turns out that the diversified donor factor is modestly correlated with two factors shown earlier. In particular, nonpartisan donors are more likely to spread their bets across a greater number of candidates. Similarly, due to contribution limits, corporate PACs tend to donate small amounts to many candidates.
Finally, we combine our various donor factors into two different multi-factor composites. On one hand, the “Fairshake Strategy” combines the nonpartisan; corporate or ordinary employee; and diversified donor factors. On the other hand, the “Elon Musk Strategy” combines the partisan, executive, and concentrated donor factors.
The final exhibit shows the backtested returns of stocks employing these contrasting political strategies relative to those of the broader stock market.
Exhibit 32
Fairshake vs. Elon Strategies
Source: FEC, S&P, Sparkline. Blue is an equal-weighted composite of (1) nonpartisan, (2) ex-executive (i.e., corporate or ordinary employee), and (3) diversified stocks. Red is an equal-weighted composite of (1) partisan, (2) executive, and (3) concentrated stocks. See earlier exhibits for definitions of these underlying factors. Universe is the largest 1,000 U.S. stocks by market capitalization. Excludes transaction and financing costs. See important backtest disclosure below. As of 9/30/2024.
Since 1997, stocks investing in political influence using the “Fairshake Strategy” have historically outperformed those following the “Elon Musk Strategy.” While Elon is a brilliant businessman, the historical data suggest that concentrated, partisan donations from executives tend to not accrue much value for shareholders, at least on average.
As equity investors, we are better off following the crypto industry’s lead, buying companies investing in political influence through a diversified portfolio of candidates from both parties, while ignoring outsized executive donations.
Conclusion
With the presidential election just two weeks away, tensions are running high. In today’s polarized political climate, firms and employees are increasingly pressured to take sides. Using political campaign contribution data, we identify the firms and sectors most active in partisan politics.
In Investing in Influence (Nov 2022), we found that firms that invest in political influence through campaign donations earned excess stock returns. However, not all contributions have an equally positive impact on stock prices.
First, we find that nonpartisan donations have delivered higher returns than partisan donations, while also mitigating political risk. Next, we learn that donations from ordinary employees and corporations themselves have outperformed those from executives. Finally, we observe that companies donating to more diversified rosters of political candidates have outperformed.
Over the years, our research has consistently shown that investors can benefit from buying firms with undervalued intangible assets, with political influence being an important category. However, this paper demonstrates that, like any investment, the expected return to political contributions depends greatly on how strategically they were deployed.
Disclaimer
This paper is solely for informational purposes and is not an offer or solicitation for the purchase or sale of any security, nor is it to be construed as legal or tax advice. References to securities and strategies are for illustrative purposes only and do not constitute buy or sell recommendations. The information in this report should not be used as the basis for any investment decisions.
We make no representation or warranty as to the accuracy or completeness of the information contained in this report, including third-party data sources. This paper may contain forward-looking statements or projections based on our current beliefs and information believed to be reasonable at the time. However, such statements necessarily involve risk and uncertainty and should not be used as the basis for investment decisions. The views expressed are as of the publication date and subject to change at any time.
Backtest Disclosure
The performance shown reflects the simulated model performance an investor may have obtained had it invested in the manner shown but does not represent performance that any investor actually attained. This performance is not representative of any actual investment strategy or product and is provided solely for informational purposes.
Hypothetical performance has many significant limitations and may not reflect the impact of material economic and market factors if funds were actually managed in the manner shown. Actual performance may differ substantially from simulated model performance. Simulated performance may be prepared with the benefit of hindsight and changes in methodology may have a material impact on the simulated returns presented.
The simulated model performance is adjusted to reflect the reinvestment of dividends and other income. Simulations that include estimated transaction costs assume the payment of the historical bid-ask spread and $0.01 in commissions. Simulated fees, expenses, and transaction costs do not represent actual costs paid.
Index returns are shown for informational purposes only and/or as a basis of comparison. Indexes are unmanaged and do not reflect management or trading fees. One cannot invest directly in an index.
No representation or warranty is made as to the reasonableness of the methodology used or that all methodologies used in achieving the returns have been stated or fully considered. There can be no assurance that such hypothetical performance is achievable in the future. Past performance is no guarantee of future results.