U.S. senators' personal stock portfolios outperformed the market by an average of 12 percent a year in the five years to 1998, according to a new study.
"The results clearly support the notion that members of the Senate trade with a substantial informational advantage over ordinary investors," says the author of the report, Professor Alan Ziobrowski of the Robinson College of Business at Georgia State University.
He admits to being "very surprised" by his findings, which were based on 6,000 financial disclosure filings and are due to be published in the Journal of Financial and Quantitative Analysis.
"The results suggest that senators knew when to buy their common stocks and when to sell."
First-time senators did especially well, with their stocks outperforming by 20 percent a year on average — a result that very few professional fund managers would be able to achieve.
"It could be argued that the junior senators most recently came out of private industry, so may have better connections. Seniority was definitely a factor in returns," says Prof. Ziobrowski.
There was no difference in performance between Democrats and Republicans.
A separate study in 2000, covering 66,465 U.S. households from 1991 to 1996 showed that the average household's portfolio underperformed the market by 1.44 percent a year, on average. Corporate insiders (defined as senior executives) usually outperform by about 5 percent.
The Ziobrowski study notes that the politicians' timing of transactions is uncanny. Most stocks bought by senators had shown little movement before the purchase. But after the stock was bought, it outperformed the market by 28.6 per cent on average in the following calendar year.
Returns on sell transactions are equally intriguing. Stocks sold by senators performed in line with the market the year following the sale.
When adjusted by the size of stocks, the total portfolio returns outperformed by 12 percent a year on average. The study used a total market index as the benchmark for comparison.
The study took eight years to complete because there was no database of information and the documents had to be gathered and examined manually. Stocks held in blind trusts are not included in the disclosure documents.