Partisanship in Mutual Fund Portfolios : Biased Expectations or In-Group Favoritism?

Partisan bias in fund portfolios is the effect of fund manager's political affiliation on portfolio allocation decisions. I study two potential channels of this bias: biased expectations where managers become optimistic (pessimistic) when their party comes in (goes out of) the government, and in-group favoritism where managers have higher holdings of politically aligned firms. I find strong evidence for the biased expectations channel. Managers misaligned with the incumbent party underweight value, small, and volatile stocks, and overweight momentum stocks. However, contrary to past literature, I find no evidence for in-group favoritism. I also document a partisan bias in holdings of stocks exposed to politicized topics (COVID-19 and Brexit) but limited evidence for past pandemics (H1N1, Ebola and Zika)