Why Investing In Women Matters

An interview with Pax World President & CEO Joe Keefe and Senior Portfolio Manager Sujatha Avutu about the Pax World Women¹s Equity Fund including why Pax World acquired an existing fund, the Women’s Equity Fund, and why they believe the Fund, under Sujatha’s management, is particularly appropriate for investors who believe that companies that emphasize gender equality may, over the long term, make better investments.

What was it about the Women’s Equity Fund that made you want to bring it into the Pax World fund family?
Keefe: When I joined Pax World, I almost immediately contacted Linda Pei and Leslie Christian and their team at the Women’s Equity Fund because I thought they had a great idea and that the Fund might be a great acquisition for Pax World.

Why did I like the idea so much? Well, I have long felt that gender equality should be a core issue at the heart of corporate social responsibility (CSR) and at the heart of sustainable investing.  But it really hasn’t been except to the extent that the CSR and socially responsible investing (SRI) movements have addressed it through the somewhat narrower lens of diversity – representation by women on boards, etc. That’s important, but I think the issue is both broader and deeper than that. We know, for instance, that gender inequality is probably the number one impediment to sustainable development around the world.

There’s a great quote from historian David Landes, author of The Wealth and Poverty of Nations: “The best clue to a nation’s growth and development potential is the status and role of women.” So, if we want to promote sustainable investing, and sustainable development, we really need to focus on gender equality and women’s empowerment as core issues.

Which is why I want to begin by acknowledging the contribution of Linda Pei and Leslie Christian and their colleagues who came up with this innovative idea, who launched this Fund, and then stuck with it through the years. I think the Fund has great potential, and we certainly have ambitious goals for it at Pax World, but our ambitions are only possible because of their vision.

Gender equality isn’t exactly a new issue for you, is it Joe?
Keefe: When I worked with Calvert, before joining Pax World, I actually had the privilege of leading a project that resulted in the Calvert Women’s Principles - the first global code of corporate conduct devoted to women’s rights and empowerment. Julie Gorte, who is now Senior VP for Sustainable Investing at Pax World, was very much involved in that project as well.  I also have a 14-year old daughter, so the issue is near and dear to my heart on a personal basis.

Can you explain the premise behind the Women’s Equity Fund?
Keefe: The premise behind all Pax World funds is that companies that do a better job of integrating environmental, social and governance (ESG) criteria into their business models are better positioned than their less enlightened peers to provide superior long-term performance to investors. We believe that among those ESG criteria are gender equality concerns, and companies that do a better job for women are more progressive, more forward-thinking companies. All things being equal, we think they can be better long-term investments.  In fact, a recent Catalyst study showed that companies with the highest number of women on their boards outperformed companies with the lowest number of women over time. 

Avutu: I think one of the take aways from the Catalyst study is that companies with greater gender diversity on their boards may benefit from the perspective and experience that women bring to the table, and that this enriches the decision-making process and helps these companies attain better returns. Women constitute more than 50% of the population but represent only about 15% of corporate board members. There isn’t a reason why this should be the case. The way I look at it is, all companies have a task or goal at hand to outperform their competitors, and they are given different tools to accomplish that goal. Companies that choose to use all the relevant tools that are available to them – including the talents and perspectives of women – are simply better companies. And again, the Catalyst study seems to suggest that that’s the case.

When I look at companies, one of the things I look at is whether they are aligning shareholders’ interests with management’s interests.  I may, for example, look at how much insider ownership a company has. While this doesn’t tell us in and of itself how a company will perform, we do believe that where interests are aligned there is more likely to be long-term success. Similarly, when it comes to gender issues and advancing the economic prospects of women, we don’t think there is any doubt that these issues can be material to company performance and portfolio performance over the long term.

Can you give a more concrete example of how a board with a larger composition of women would make better decisions?
Keefe: You can’t easily say that Company A is better than Company B because it has more women on its board of directors. What we believe is that a portfolio of companies that are better on women’s issues has certain competitive advantages versus a portfolio of companies that are less committed and proactive on women’s issues.

Avutu: How do you quantify a richness of decision-making perspective or the added acumen that diversity brings to the table and whether it makes a difference? You can quantify it by looking backwards and measuring the returns that were generated and essentially, we believe the results will be demonstrative over time.

What criteria do you use to determine gender issues? Will there be a scorecard – these companies pass and these companies fail?
Avutu: We will look at companies that have internal programs and policies that promote women’s economic development and advancement. One of the refrains you often hear is, “Well, we’d like more women in senior management, or on our board, but there isn’t a pool of qualified women to choose from.” How does a company get around that issue? They get around it by having programs and policies that promote the recruitment, training and advancement of women in the workplace. Companies need to set priorities at an earlier stage and develop that pool of women. Our hope for this Fund is that as we get bigger, and potentially have more clout, we can take a more active role – talking to management, asking tough questions, applying pressure where necessary – in order to promote gender equity and women’s empowerment.

Is there a difference in how you evaluate companies in different countries, or is there more of a standard line across all countries?
Keefe: In all of our funds we have to look at the particular region and country and at particular issues that may arise in some places that don’t arise, or aren’t as important, in others. When you’re talking about gender, this is particularly true. In Japan, for example, it would be very difficult to find a company with women on its board. You may have to apply a somewhat different gender equity lens than you do for US companies, emphasizing different issues and looking at different criteria. One uniform global standard is probably the wrong approach at this point in time, and if we are going to make progress on gender equality, we will need to be more sophisticated, flexible and nuanced in the way we evaluate companies.

Could the Women’s Equity Fund potentially have a powerful influence on how companies conduct themselves?
Avutu: Our intention is not just to invest in companies that have a token woman on the board, for example, but to engage in conversation with companies – can they explain their process, how they view the board composition, how do they attract and retain women, and promote them to senior management, etc. What are their policies with respect to equal wages and work-life balance? These are things you can monitor once you start having the conversations. There has to be a starting point. Years ago, racial and ethnic diversity was not high on companies’ priority lists, but as time went by, it became a higher priority. That’s because companies were engaged on this issue. So I think there has to be a starting point, and I think there is plenty of room for progress.

Keefe: I agree. Over the last 20 years, proactively engaged shareholders have had an influence in ending apartheid in South Africa, convincing Dell Computer to take a leadership position on recycling computers, convincing companies to disclose their environmental performance and reduce greenhouse gas emission, adopt nondiscrimination policies toward gay and lesbian employees, change and improve their corporate governance structure and more. It may take time, but we believe shareholder engagement works. And we believe that in this Fund, particularly working with other like-minded investors over time, we can have an impact on gender equality, and we can have an impact on the way companies treat women.

Take the trafficking issue, for example – trafficking in women (and more often than not, young girls) for purposes of prostitution. We know this is a huge problem in the world today. It’s essentially a form of slavery and a form of violence. And obviously we know that certain industries and certain companies have more interaction with this process than others. They may not be involved in trafficking directly, or supporting it knowingly, but perhaps they are unwittingly facilitating it. The hospitality, travel and tourism industries may have some exposure in this regard, and may also have an opportunity to do something about this terrible problem. Someday perhaps, because we own certain of those companies, we can engage them about what to do to reduce human trafficking and prostitution and slavery – most of which affect women. I’m not saying we can be successful overnight, but it’s not wrong to have this aspiration for this Fund – perhaps we can make a difference over time.

What is the investment universe for this Fund and what will be the benchmark?
Avutu: Well, this will be a multi-cap core fund. When you talk about an unmanaged benchmark, we would look at the Russell 3000. That said, this Fund will also invest in global companies as well. That is one of its attractive features. We are going to scour the international markets in search of companies that are proactive on gender issues. So, first, we will look at companies that have proactive policies, programs and performance that promotes women’s equality and advancement. Second, we will actively seek out companies whose business models themselves promote the advancement and empowerment of women. An example would be Bright Horizons, a company that provides on-site childcare services to businesses. This company’s business model in and of itself promotes and supports women in the workplace. In addition, we will also invest directly in women-owned businesses, including investments in microfinance or microcredit initiatives that help women in developing countries – programs that can profoundly impact women’s whole lives. This Fund contemplates a broad scope of investments that we hope will benefit women while also benefiting our shareholders.

Sujatha, you’ve touched on the Fund’s investment methodology. Perhaps you can explain it in more detail.
Avutu: Sure. We will apply a layered approach to constructing this portfolio, and we believe this provides the right canvas on which to paint this picture. What we mean by a layered approach is, first, starting with rigorous financial research and fundamental analysis and then scouring global companies that fit our financial criteria for the inclusion in this Fund. Second, applying our ESG criteria, as we do with all of our funds. Third, supplementing our ESG criteria with what I call ESG & G criteria – that is, not only environmental, social and governance issues, but looking separately at gender issues as well. I think this additional layer of assessing risk and opportunities from a different vantage point will only help in identifying better investment opportunities for our shareholders. Finally, the last piece is portfolio construction itself, where we use a pyramid approach to diversifying the portfolio along risk and reward guideposts. In the end, our intent is to create a portfolio that will be resilient and deliver sustainable performance through various economic and business cycles, and deliver superior long-term returns to our shareholders.

The pyramid approach for the Women’s Equity Fund will be a little different than the pyramid approach we will be using in the Pax World Value Fund, which I also manage. Here, we look at the base or core layer of the pyramid that constitutes maybe 50-60% of the portfolio. These will be core growth companies that have sustainable or predictable earnings – that provide the predictability of returns to the portfolio. On top of this bottom layer, the second layer of companies focuses on emerging growth opportunities. This will likely constitute anywhere between 30-40% of the Fund. In this layer, we try to capitalize on the companies that are in the developing phase of growth trends. And on top of this is a third, smaller layer of what we call special situations. Here we focus on cyclical opportunities or opportunities where the sum of the parts is greater than their current market valuations. This is where we try to capture the private-to-public market gap. Applying these different layers of opportunities allows us to construct a portfolio that we believe will outperform in the long term. 

Who ought to be investing in the Women’s Equity Fund?
Keefe: We think this Fund is a potentially attractive opportunity for long-term investors who believe, as we do, that how companies treat women matters, that it’s important and, in fact, that it’s an indication of smarter, more forward-thinking management. In other words, this Fund is for investors who care about these issues and who believe, as we do, that gender equality is not just good for women but good for business – good for long-term financial performance. And we also obviously think this Fund is for women investors and institutions that may care particularly about issues affecting women. We’re talking about women’s rights, women’s empowerment, gender equality. We think there’s a broad market, both individual and institutional, of people who care about these issues and see the benefit of integrating these concerns into their investment portfolios.

Avutu: I would only say that for institutions such as women’s colleges or universities or foundations or non-profits that focus on gender issues, on issues affecting women, this fund can give them real alignment with their institution’s mission. Or to put it another way, if they want to align their investments with their mission, the Pax World Women’s Equity Fund may be a particularly attractive option.