When was the last time you thought about gender diversity in Investment Management? Never? Well, you might want to rethink that.
Recent data shows that only 10 percent of all U.S. investment managers are women. But that’s not the whole story. Consider this fact: the amount of investment dollars managed by firms which are majority women-owned represent only one percent of total assets under management (AUM). That is correct – one percent!
Why does this matter? Let’s start with resilience. It is widely accepted that our well-being as a society depends on having resilient social and environmental systems. Diversity in nature allows species to better manage unexpected and disruptive forces in their environments.
As well, diversity among investment portfolio managers can lead to greater resilience and potentially higher investment returns. This is true when you seek diverse investments and, also diversity in investment managers. Not only can the latter diversity reduce the risk of group thinking; it can also expand investing opportunities.
This lack of diversity in investment management is thoroughly researched and documented in the soon-to-be-released book Undiversified by Ellen Carr and Katrina Dudley. Both authors are experienced investment managers. Carr invests in high-risk debt at a majority women-owned firm, and Dudley invests in publicly-traded companies at a prominent investment firm.
Their book poses a crucial question: Why does the culture of Active Investment Management (IM) firms mirror the gender imbalance that exists in industries like Silicon Valley and television comedy?
This leads to another question: how successful are Active Managers in producing portfolio returns that are greater than market returns?
In fact, the authors report that investors are often not getting better than market returns – especially over longer periods of time. This is one reason why many investors are putting their money into index funds. In other words, investors are willing to give up the potential of earning better-than-market returns, so they can reduce their risk of earning below-market-returns.
The authors pose a question too often ignored, “…what if the investing industry’s failure to meet investor expectations is due to its predominantly male workforce?” In other words, could the lack of gender diversity among U.S. investment managers limit your wealth potential?
Indeed, the authors show that promoting gender diversity in investment management is a smart and a good thing to do. They tackle two tough questions:
- Since having diverse investment portfolios is a preferred strategy for reducing reduce risk and increasing returns, shouldn’t the same principle apply to choosing diverse investment managers?
- Why do investment portfolios – managed predominantly by men – often fail to generate returns that are greater than market returns?
Research shows that male portfolio managers and individual traders tend to trade stocks more frequently than female traders. This increases transaction costs and reduces all-in returns. Furthermore, female investors are more likely to consider both the pros and cons in their research. And while this doesn’t make them more risk averse, it does increase their risk awareness.
Carr and Dudley report that female investors tend to be less emotionally attached to a quick win than do their male counterparts. And they are more likely to unload losing investments. Male investors – and senior male managers at investment management firms – sometimes say, “I just see numbers…I don’t see gender.”
But there is substantial evidence that track records are not the sole driver of promotion.
Carr and Dudley want women to choose investment careers – so they can generate wealth for themselves and their clients. Why not? When they apply both their listening and analytic skills, these women can build worthwhile, rewarding careers. The authors hope that Undiversified will inspire more women to go into IM so they can transform “old boys’ club” cultures into “bro-fem” cultures.
Yes, women are leading the way. Kathryn (Katie) Koch, for example, has been co-head of Goldman Sachs Asset Management’s $100 billion Fundamental Equity business since 2018.
Today, half of Fundamental Equity’s assets are managed by women and ~88% of Fundamental Equity’s strategies have outperformed their benchmark over the last 3 years on a gross of fees basis (as of September 3, 2021).
Not only is gender diversity key to selecting companies in her investment fund, but Goldman Sachs Asset Management was also among the first to vote against public company nominating committees that failed to include at least one woman on its board. Koch admits that this action is not enough – but it is a good place to start.
*Old Boys’ Club: an informal system by which money and power are retained by wealthy white men through incestuous business relationships. It is not necessarily purposeful or malicious, but the Old Boys’ Network can prevent women and minorities from being truly successful in the business world. Urban Dictionary
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