Barclays recently joined the growing number of financial firms that are betting on female directors as a bellwether for corporate success. Last July the British bank launched its Barclays Women in Leadership Exchange Traded Notes and the linked Women in Leadership Total Return Index. Spanning ten sectors, the latter comprises U.S.-headquartered companies with the highest percentage of female board members, giving extra weighting for those with a female chief executive.
As of late February, total issuance for the Barclays notes was about $28 million, and buyers have included retail and institutional investors. The accompanying index currently consists of 83 companies, and its upper limit is 100; for each sector it holds up to ten of the top companies by gender ranking.
Research that suggests a connection between board diversity and companies’ financial health figured in the gender-themed offering, explains Susan Meirs, COO of structured products at Barclays Capital in New York. But it was also “an idea whose time had come,” she says, given the ongoing debate about fair treatment in the workplace. “We realize that things are not equal,” Meirs adds. “From an investment standpoint, how do we leverage that?” She and her colleagues decided that the best approach was to put money on the thesis that companies with higher gender equality are better companies overall.
Numerous studies support the idea that applying a gender lens to portfolio management can deliver outperformance. But correlation doesn’t equal causation — and there’s evidence that over time, investors may quietly punish corporations for pulling more women onboard.
Barclays has several competitors in this new space, among them sustainable investment firm Pax World Management, whose gender-focused index fund launched last June. Portsmouth, New Hampshire–based Pax, which manages $3 billion in assets, created the vehicle with Ellevate Asset Management, a firm that launched with the Pax fund partnership and arose from Ellevate, a women’s networking organization chaired by Sallie Krawcheck. Now principal of Ellevate Asset Management, Krawchek is a former top-ranked analyst on the All-America Research Team who ran the wealth management businesses at Bank of America and Citigroup.
The $70 million Pax Ellevate Global Women’s Index Fund invests in the 400 corporations worldwide with the highest percentage of women on the board and in management. At the end of 2014, all of its top ten holdings were American: The seven companies tied for first, with 2 percent of total holdings apiece, included beverage maker Coca-Cola Enterprises, consumer goods conglomerate Procter & Gamble Co. and document technology multinational Xerox Corp.
Morgan Stanley introduced its Parity Portfolio in early 2013. The actively managed equity product, whose 25 holdings consist of U.S.-based companies with at least three female directors, courts institutional and retail investors. The U.S. bank won’t disclose the fund’s positions or total assets, but New York–based portfolio manager Eve Ellis says the sectors overrepresented in its investible universe are consumer discretionary, consumer staples and health care — though they’re not necessarily more heavily represented in Parity.
As for the research that backs their investment theme, managers of such funds often cite a 2007 report from Catalyst, a New York–based nonprofit focused on creating more opportunities for women in business. After examining the financial performance and board makeup of Fortune 500 companies between 2001 and 2004, the authors noted that the top quartile with the highest female representation on their boards beat the bottom quartile in their return on equity (by 53 percent), return on sales (by 42 percent) and return on invested capital (by 66 percent).
In 2012, Credit Suisse Group published a report on the topic that analyzed the performance of 2,400 corporations between 2005 and 2011. Its conclusion: Those with at least one female board member enjoyed less volatility throughout economic cycles — a feature that was especially pronounced just after the 2008 financial crisis.
Research provider Gallup, consulting firm McKinsey & Co. and research and news outfit Thomson Reuters Corp. have also released studies that point to the value of gender diversity in the boardroom and within management ranks.
In explaining these results, the reports often highlight the positive effects of diversity on teams. The Gallup report notes that gender-diverse teams draw from a broader base of industry knowledge, for example. The Credit Suisse study cites findings from management researchers suggesting that team members are likely to put more effort into preparing for a task that involves working with a diverse group than they do when collaborating with a homogenous one.
But Harvard University sociology professor Frank Dobbin, who is also interested in how gender diversity might affect company performance, disputes the seemingly straightforward link between the two. Dobbin modeled and compared the performance, board diversity and institutional investor holdings of 400 U.S. corporations between 1997 and 2006, curious as to how shareholders would react to greater diversity.
He found a paradox: Although public pension funds in particular have been pushing for more women on boards, many kinds of investment funds seem to recoil when companies meet these demands. The largest institutional investors tend to react positively to news of a female board appointment by purchasing more shares, but asset management firms holding less than 5 percent of a company’s stock often reduce their stake after such an event.
In Dobbin’s modeling, women are neither positively nor negatively correlated with companies’ profitability. His guess is that shareholders’ adverse reactions are subconscious: “Some people have suggested that this may be because institutional investors think that women board members typically have less business experience than male board members,” he says.
Dobbin takes issue with much of the research purporting to link gender-diverse companies with better financial heath or stock performance. He argues that the Catalyst and Credit Suisse reports fail to show causation because they average returns over a few years and fail to control for a company’s age or other factors.
“Showing that women directors are associated with higher returns on equity simply means that firms with more women have higher returns,” he says, stressing that although the gender correlation may exist, board diversity isn’t necessarily the deciding variable. “This [correlation] is likely because they are in newer and more profitable industries, or they have strong enough returns that they can focus on issues such as promoting diversity, or any number of [other factors].”
Whatever the reason, the Barclays, Pax and Morgan Stanley investment products all report outperformance, though for the most part track records are still short. Since inception through mid-February, Morgan Stanley’s Parity Portfolio had gained 54.26 percent, just beating its Russell 3000 Index benchmark, which returned 53.83 percent during the same period. The Barclays index has outstripped the S&P 500 Index by about 1 percent over the past five years, using a back-test of the former that tallies collective performance of its constituent companies in the years before it launched.
The Pax Ellevate Global Women’s Index Fund is finding that the bulk of outperformance comes from companies that are the most progressive when it comes to gender equality, notes Pax president and CEO Joseph Keefe. (Because of Financial Industry Regulatory Authority rules, the firm can’t make exact returns public because the fund is less than a year old.)
Keefe says he’s encouraged by the fund’s performance to date, and by the strong outperformance of the companies with the most female representation: “So far, it seems to be substantiating the thesis that these companies will perform well, and perhaps a little better than the market as a whole, because of diversity of leadership.”
