Responsible Gender Lens Investing
Within a holistically-designed investment process, diversity of an Executive Team and Board of Directors is a powerful variable to analyze the stock’s long-term capability of preserving and growing wealth for shareholders.
My 22-year career in institutional investment management has been typical along several dimensions, including the fact that I have always been surrounded by older white men – in the office, boardroom, due diligence meetings, and at conferences. My experience reflects what Morningstar reports, “in the U.S., women make up just 10% of fund managers.”
In every business setting, I am almost always the only woman in the room. No one has ever said that older white men are incapable of carrying out high quality investment management services; of course they are. But they’re not the only ones with investment game, and evidence shows that diverse investment teams make better long-term decisions. I’m not so much arguing against the pale-male-stale investment managers as I am against their monopoly of the field. The 10% figure is no where near high enough.
Lack of diversity of financial services professionals is finally being talked about, but not sufficiently. It should be discussed more and in deeper ways, and – importantly – remediated in practice, because of the well-documented fact that heterogeneous teams outperform homogenous teams, across disciplines, and not by an insignificant amount.
Setting the specific world of asset management aside for a moment and speaking generally, heterogeneous teams create fewer governance controversies, they have higher rates of creating genuinely leapfrogging innovations, they are more customer-centric, they are more likely to capture new markets, and their sales growth rates are higher. In the case of asset management, they construct better portfolios.
I suppose it is no surprise that an industry lacking in diversity itself has not yet mastered the art and science of managing gender-lens and other diversity-oriented investment portfolios; it can be hard to recognize virtues that one does not practice. It may not be surprising, but it is embarrassing. I’m embarrassed on behalf of my financial professional brethren.
Not that they have not tried; there are gender-focused investment portfolios out there, but many can be found wanting. The first thing that I find objectionable about most of the publicly-traded equity gender-lens portfolios is that they ignore anything and everything about a company, except for whether a woman can be counted on a management team and/or Board of Directors (separately and collectively referred to as a ‘leadership team’ from here on).
I cannot imagine an investment professional judging an investment process to be prudent if it solely evaluates the constituents of a leadership team, ignoring what the company produces, how fast it is growing, where it receives revenue from around the globe, what its uses of capital are, or any number of other variables.
And yet, many gender-lens portfolios are constructed by simply applying a screen to an index to count the number of women in leadership, removing those companies without any women, and investing in the remaining list of stocks. As if the presence of a female in leadership ranks alone constitutes an investable company.
Yes, I am arguing that diversity of a leadership team is a highly material variable that should be assessed and factored into a prudent investment process. However, it is one of many variables that should be analyzed to create a holistic picture of a company’s risk and opportunity profile. First and foremost, how and from where a company derives its revenue stream must be evaluated to determine if it fits the portfolio’s growth thesis. Once that question has been answered and alignment between the company’s and portfolio’s reasons for being has been appropriately confirmed, then the other variables should be evaluated, including the diversity and strength of the leadership team.
The second thing that I find objectionable about many gender-lens equity portfolios is the prevalence of tokenism. After a company has passed through a multi-variate, rigorous analysis, and it is time to assess the diversity of a leadership team, it is not sufficient merely to find a lone woman on a leadership team and call that company worthy of investment on a gender-lens basis. In their academic paper “Critical Mass on Corporate Boards: Why Three or More Women Enhance Governance,” Kramer, Konrad and Erkut found that as a leadership team crosses a critical threshold of at least three women “difficult issues and problems are considerably less likely to be ignored or brushed aside, which results in better decision-making.” Those companies with at least three women on their Board of Directors suffered materially fewer governance controversies.
In the Credit Suisse “CS Gender 3000: The Reward for Change” report, an important section focuses on “outperformance of the 50% club” highlighting impressive findings, including: “for companies where there are over 50% females in the top echelons…lower leverage, higher dividend payouts, and higher return on capital employed lend support to the idea that diversity implies better returns for lower risk.” The financial metrics achieved by companies with a sole woman in leadership are not nearly as impressive as those with three or more women. Further, the most spectacular financial successes were achieved by companies with the ideal 50:50 women:men ratio in leadership. Again, tokenism is insufficient to yield meaningful results, so a prudently managed gender-lens portfolio must have higher inclusion thresholds than a sole woman in leadership.
I have empathy with investors who are trying to find gender-lens portfolios that are worthy of their hard-earned money, because it can be incredibly difficult to understand what the managers are doing from their marketing language. Fact sheets and other presentation materials often use phrases like “addresses gender disparities,” or “higher representation of women…” But the prospective investor is too often left to ask, ‘how does the portfolio address gender disparities?;’ ‘“Higher representation of women” relative to what? Does that mean higher than zero?’ And does that mean that counting a sole woman anywhere on a management team or the Board of Directors is sufficient to be included in that gender-lens portfolio? In my experience that is often what it means, but the portfolio management company does not want to tell investors that their bar is that low, and they use confusingly vague marketing language to give themselves as much leeway as possible in their portfolio construction processes.
So, what’s an investor to do? Ask questions, please! If you are interested in selecting a strong gender-lens portfolio, and you cannot tell exactly what criterion the managers have used or why they believe their criterion include the most material factors, either call or email the investment company and ask exactly those questions. In addition, I encourage investors to ask broad questions like, “Please tell me which holding in the portfolio has the lowest representation of women in leadership, and why it is included in the portfolio.” Answers to questions like that can quickly tell an investor if their values, assessment of materiality, and vision of a prudently invested portfolio are in line with the portfolio manager’s.
The evidence is clear: to perform at the highest levels, a team should be as diverse as possible along many lines, including gender. The investment management industry has a long way to go to achieve the ideal 50:50 women:men ratio in its workforce and leadership teams, and we can only get there through real discussion of the facts, and careful planning of steps to take to reach that goal. At the same time, knowing the increase in financial success it is likely to achieve, investment teams should include gender and other diversity analysis when evaluating the strength of a potential investment’s leadership team. When included as a component in a holistically-designed investment process, it can be a powerful tool to identify strong corporate performers, and thus to increase a portfolio’s capability of preserving and growing clients’ wealth.
Article by Betsy Moszeter, COO of Green Alpha Advisors. As Chief Operating Officer, Betsy ensures Green Alpha successfully serves the firm’s expanding client base. She is also an active member of the Investment Committee and oversees business development activities, coordinating progress on strategic and tactical objectives.
Betsy joined the team in January 2015, drawn to Green Alpha’s unique methods of building sustainability-oriented, innovation-driven portfolios one stock at a time—never deviating from the underlying Next Economics framework. She first became acquainted with Green Alpha through her work at First Affirmative Financial Network, LLC. As a core part of her job, Betsy became familiar with many sustainability-oriented investment options and was particularly impressed by Green Alpha’s rigorous research approach.
As the SVP and a Managing Member of First Affirmative, Betsy was responsible for building the firm’s third-party platform business and institutional account investment capabilities. She spoke often at industry conferences and worked with many organizations to promote the sustainable, responsible, impact (SRI) investing industry and The SRI Conference.