Back when I was an equity research analyst, I quantified everything I possibly could. I figured that my opinion and my intuition were likely no better than anyone else’s, but that my analysis and numbers were really worth something. Multiple regressions were my best friend, carefully laid out in 100-page-plus research reports.
But there was one question that I was asked in every single portfolio manager meeting – every single one – that I couldn’t answer with numbers or statistics. That it was asked so often meant that, for my clients, it was one of the most important determinants of whether they would invest in a company, and I didn’t have a great answer for it.
That question was: Is management any good?
Sure, I would form opinions based off of what I heard on earnings conference calls or investor days, and from the very occasional private meeting. And I tried to quantify the answer, by analyzing factors like management tenure and past performance. But I came up short.
That was then; this is now. Because I am confident that I have the answer now. I believe that we have the factor that results in leadership teams delivering superior returns on equity, superior returns on sales, lower risk, greater long-term focus, greater employee engagement, greater client engagement, lower gender pay disparities…even greater innovation.
Drum roll, please……
The factor is leadership team diversity, in this case gender diversity.
Three years ago, I teamed with Pax World to launch the Pax Ellevate Global Women’s Index Fund. The first mutual fund of its kind, this fund invests in the top-rated companies in the world for advancing women. This is measured by percent of women on companies’ boards of directors and in their management teams, as well as other factors such as whether the companies have a female CEO or CFO and whether they have signed the UN Women’s Empowerment Principles.
We can debate whether three years is a short or long period of time. We can also debate whether greater gender diversity is a cause or effect for superior performance. What we can’t debate is that the three-year performance of the Pax Ellevate fund has been strong, with its institutional share class outperforming the MSCI World Index.* And while I’m no longer a big fan of active management as it has been historically typically practiced, we believe that we are demonstrating, in real time, that gender diversity and superior company performance can go hand-in-hand.
Even better, this fund – and an increasing number of others like it – enable investors to invest in companies whose values align with theirs; they can put their capital to work doing the double duty of earning a return for them and driving capital to companies that are having a positive impact.
For me personally – as a mother, as an aunt, as a businessperson – giving more women the opportunity to be in leadership positions in business is something that I care about. And therefore I want to direct some portion of my investing dollars to supporting companies whose values align with mine on this issue.
(Full disclosure: for years, I thought this type of investing was a loser. Surely one had to give up returns in order to invest this way. And in the early days of values-based investing, this may have been the case. But the case is increasingly being made – by funds like Pax Ellevate and a number of others – that doing good and doing well can go hand-in-hand in investing.)
As an aside, on Wall Street, there is a term “crowded trade.” It is a trading bet that it seems like “everyone” is making. It can be a bet that the Fed will raise rates or that the value of the Euro will fall. The term implies that the bet will be a bad one – after all, if “everyone” is making the same bet, not much has to go wrong with it for it work out poorly.
You don’t often hear the term “uncrowded trade.” But I would make the case that “diverse leadership teams drive superior business results” is an uncrowded trade.
This is not an investing factor that the financial press is writing much about (and, believe me, we’ve tried to get them to write about it), or that traders are discussing on CNBC, or that portfolio managers are discussing in Barron’s. And it can take a bit to wrap your head around how diversity can drive better business results. The best way I’ve been able to describe it is that you wouldn’t want to be a big fan of a basketball team of just point guards; they’ll lose a lot of games. Neither, I would argue, do you want a leadership team that has no diversity.
So, for now, you won’t hear a lot from many others about diversity driving superior performance. But one thing I learned as a research analyst: I prefer to make a bet that others are not making, than to be in the crowd.
Sallie Krawcheck’s professional mission is to help women achieve their financial goals. She is the Chair of the Pax Ellevate Global Women’s Index Fund. She is also the CEO and Co-Founder of Ellevest, an innovative digital investing platform for women, and the Chair of the Ellevate Network. She is the best-selling author of Own It: The Power of Women at Work.
*The annualized returns for the Pax Ellevate Global Women’s Index Fund – Individual Investor class as of 06/30/2017 were, 1 year: 16.46%, 3 year: 5.66%, 5 year: 11.02%, 10 year: 3.42%. The annualized returns for the Pax Ellevate Global Women’s Index Fund – Institutional class as of 06/30/2017 were, 1 year: 16.83%, 3 year: 5.93%, 5: year 11.31%, 10 year: 3.68%. The returns for the MSCI World Index as of 06/30/2017 were, 1 year: 18.20%, 3 year: 5.24%, 5 year: 11.38%, 10 year: 3.97%. The returns for the Pax Global Women’s Leadership Index as of 6/30/2017 were, 1 year: 17.42% and 3 year: 6.50%.
Performance data quoted represent past performance, which does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For most recent month-end performance information, visit here.
On 6/4/2014, the Pax World Global Women’s Equality Fund merged into the Pax Ellevate Global Women’s Index Fund (the Fund), pursuant to an Agreement and Plan of Reorganization dated March 4, 2014 (the “Reorganization”). Because the Fund had no investment operations prior to the closing of the Reorganization, Pax World Global Women’s Equality Fund (the “Predecessor Fund”) is treated as the survivor of the Reorganization for accounting and performance reporting purposes. Accordingly, all performance and other information shown for the Fund for periods prior to 6/4/2014 is that of the Predecessor Fund.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 23 developed market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. One cannot invest directly in an index. Returns are shown net which includes dividend reinvestments after deduction of foreign withholding tax.
RISKS: Equity investments are subject to market fluctuations, the Fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. The Fund does not take defensive positions in declining markets. The Fund’s performance would likely be adversely affected by a decline in the Index. Investments in emerging markets and non-U.S. securities are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation, intervention and political developments. There is no guarantee that the objective will be met and diversification does not eliminate risk.