From the outset, CEO Darcy Johnson wanted Fulcrum Capital, the investment management firm she co-founded in Seattle, to help clients align their investments with their values, with one caveat: the first priority was making money.
Johnson met Fulcrum co-founder Robert Kuehn while working at Seafirst Bank in the eighties. Since they started Fulcrum in 2007, the business has grown to become a nine-person, woman-run team, placing it among the two percent of U.S. advisory firms that are woman-owned at a time when half of U.S. firms don’t have a single woman advisor.
From the beginning, Fulcrum managed funds focused on sustainability, including analyzing gender diversity in its investments. But after Johnson joined the board of the InFaith Community Foundation, a Minneapolis-based Christian charity, in 2015, she saw first-hand the power of a gender-focused portfolio. At InFaith, she helped develop the WomenInvest InFaith portfolio, the smallest of the charity’s four portfolios, which focuses on using investment to improve the lives of women and children.
WomenInvest leverages its $11 million portfolio to boost economic opportunities for women, including access to education, affordable housing, and other opportunities that promote wellbeing. It includes companies with more than 50% of women on the board, such as American Water Works (NYSE: AWK), a waste and water utility firm, and companies that support women to build assets, such as the Self-Help Credit Union, which provides access for women to open their first saving account, start a business, or buy a home.
The success of that portfolio led Johnson to open Fulcrum’s own gender-focused fund in June. In addition to helping women, she expected to generate superior returns.
Gender-lens investing, as this strategy is known, has become increasingly popular as companies with a high proportion of women in leadership positions have outperformed those that do not. Research has repeatedly shown that the higher the percentage of women in top management, the greater the excess return for shareholders. The total invested in gender-lens strategies hit $2.4 billion in 2018, according to Veris Wealth Partners, which advises InFaith on the WomenInvest Portfolio.
Fulcrum’s gender lens investing fund now has $2.3 million under management, which is still tiny compared to the total $542 million Fulcrum manages in client assets. The funds are invested in 25 equally weighted stocks in companies that improve the lives of women and children or promote diversity within leadership.
However, Fulcrum found the strategy to be so effective that it has integrated a basic gender lens into its regular equity portfolio. It has radically changed how Johnson thinks about investing. “At Fulcrum, we're all about making money – profitability –” she says, ”but we do believe in the power of finance to address the most pressing needs of our world, and our clients believe that too.”
Why were you brought on board to help InFaith develop its ESG portfolio?
Fulcrum Capital has been doing ESG types of investing for almost 15 years. We started with a fossil fuel free portfolio that one of our clients requested. It took off from there as we saw the benefits of the strategy. It's one of those opportunities, where you go down a path thinking you're serving a client and you end up recognizing that what he's looking for is very, very profitable.
How did the gender focused fund come about?
We had a symposium about a year ago in Seattle that highlighted InFaith’s work and also explored some of the more specific portfolio construction issues that have plagued us. That [symposium] really challenged us to step it up. We're mostly CFAs here, and we're very disciplined investment managers and performance oriented.
It seemed like almost a byproduct of that first portfolio we constructed that was fossil fuel free that it worked so well to generate alpha. And we had a number of people come to us after this symposium and say, “I want to do this, I want my money to be invested with a gender lens.” And so we started the portfolio in June of last year.
How does the portfolio work?
Our portfolio has been focused very narrowly on women on boards, women in senior management, and corporations that use policies that change and level the playing field for women.
We consider women to be one of the huge underutilized resources in the world. In fact, if you look at countries around the globe, those that have very poor gender equality are underperforming in economic terms, according to the IMF. And a McKinsey report found that advancing gender equality in the workforce could add $12 trillion in annual global GDP by 2025.
And how does the portfolio make an impact?
InFaith approaches this with the intent to invest in the root causes of violence against women. That can manifest itself in economic opportunity: counting women in senior management, access to education, affordable housing and in full participation in business and public decision-making. Investing in those root causes helps to lower the risk factors associated with violence.
At Fulcrum our approach is very different to InFaith. We’ve got the broad spectrum of asset allocation to deploy. We actually construct the portfolio under the same basic approach that we do for our model portfolio. We’re very intentional about growth-oriented companies at a reasonable price. We score each company in the S&P 500 and select from that. Then with the gender-focused portfolio we overlay that with the statistics that are generated from a number of different resources. We have found 14 metrics that we like to use that we think are predictive in nature that help us identify the companies that will perform better. It is doing very well.
Who is interested in this portfolio?
Mainly women who have met with a lot of success in their careers. And they are intrigued by the thought that they could use their money to have an impact on the lives of women and children.
I read a quote from you about the idea of Fulcrum as a kind of lever to do good in the world.
Yes, that was part of the decision to select Fulcrum. When we founded the firm the fossil fuel free portfolio had just started and it made a lot of sense.
And are you seeing more interest from investors in using assets as a lever?
Definitely. Being in the northwest doesn't hurt. It’s a fairly liberal part of the country. We have a lot of progressive people here who have made a great deal of wealth, because it is a tech hub. And that wealth is finding its way into ESG strategies. In fact, we're seeing our competition embracing ESG and coming up with new products. We welcome that.
How has the definition of ESG changed since you set up Fulcrum?
I remember watching from the sidelines as the socially responsible investment strategies came to the front. it was very confusing to me, because I looked at that and I said, “But I need companies to perform.”
It's great to fix the world, and that's why money should be directed to charitable causes, but to force companies to change their policies just didn't make sense to me as an analyst and a portfolio manager. Then we started seeing our clients prove to us that this is really a very profitable way of looking at a portfolio and judging good companies.
We really adopted it as a sustainability approach. If you think about investing in a good quality company you think about what you want from the next 10 years. It’s fairly straightforward that you look at Apple, Google and all the big technology companies are very focused on 10 year plans and not next quarterly earnings. Those companies are all going completely green, with 100% of their energy coming from alternatives.
How does gender lens investing tie in with a broader trend for impact investing?
Impact investing is a loaded term. A lot of people think of it as private placements. But it's using investment capital to address social and environmental challenges. [Gender-lens investing] is very, very different. That's probably one area where we have been able to add value: to identify good quality companies that aren't perfect. We look for the characteristics that make for a good solid growth company and overlay the gender on that. That process is somewhat integrated in Fulcrum’s normal equity portfolio. It’s then overlaid for the gender-focused portfolio so that we can identify companies that are real leaders in gender.
The SEC recently said it would start scrutinizing companies that claim to adhere to ESG principles. Do you think there’s a problem within the industry with fake ESG mandates?
I welcome the review. What matters most is the broader trend toward impact investing, and continually refining these portfolios to ensure that the strategies are having the effect of leveraging capital markets as a force for change. And the SEC process can actually help support that intent.
What’s next for ESG investing?
We have a client that is all about social justice. And we've constructed a portfolio for that client. So what we do is try to help meet client's needs. If a client wants us to do something that really puts the power of their capital to use to address a specific need, we will help them explore that.
Thank you, Darcy.
