Women at the top: a new fund betting on the link between gender diversity and higher returns
Matthew Partridge talks to Helena Morrissey about how her new fund hopes to capitalise on companies with women well represented in top positions.
Diversity and the representation of women in the boardroom is a big topic at the moment, but can it also help you beat the market? One person who has strong views on the subject is Helena Morrissey, head of personal investing at Legal & General Investment Management, and founder to the 30% club, which aims to increase the number of women on the boards of FTSE 100 companies.
There is a strong business case for bringing in a wider range of people on to company boards, says Morrissey, and she's set up a new index fund focused on gender diversity.
The fund in question is the Solactive L&G Future WorldGenderin Leadership UK Index Fund (aka Girl Fund'). Like other index funds it starts by weighing the FTSE 350 index by market cap; costs are low too, with ongoing charges of only 0.5% a year. However, unlike regular tracker fund its tilts the index to "favour those companies that have achieved higher levels of gender diversity". In particular it looks at four criteria, "women in the workforce (10% of overall score), women in management teams (30%), women at the executive level (30%) and women on boards (30%)". Naturally, it will give a higher weight to those companies that do well, and companies will need to meet minimum targets to maintain a neutral weighting.
Higher diversity scores mean higher returns
Unsurprisingly, Morrissey has little time for those who would say that it isn't the role of fund managers or investors to consider such criteria, or that ethical investment in general is a distraction. In her view "companies that create sustainable value understand that their environmental impact, labour standards and governance structures are significant drivers of that performance". In the case of gender diversity, "the Credit Suisse Research Institute looked at the impact of board and senior management diversity at over 3,000 companies globally and found that the companies which scored higher on these diversity measures delivered better returns for investors".
Of course, Morrissey admits that the evidence produced by this research, and other studies which have come to a similar conclusion is "encouraging" rather than definitive (we've covered this topic, here and here). After all, "companies have only very recently started reporting their gender diversity data, so many of these studies are using the same sets of data, which covers only the past ten to 20 years". What's more, all the usual disclaimers about causality and correlation apply.
Still, in her view "all the data available suggests a positive correlation". Morrissey also thinks that a positive link between diversity and returns seems logical given the "widely publicised" evidence that it produces "better decision-making, greater innovation and creativity and the avoidance of groupthink".
This isn't traditional SRI investing
One issue that has raised some eyebrows is the fact that the fund will invest in many companies traditionally excluded by many SRI (socially responsible investing) funds. For example, British American Tobacco is one of its largest holdings; indeed, at present only two FTSE 350 companies are completely excluded: security firm G4S (because of ethical concerns) and industrial turnaround specialist Melrose (because of its dismal score on diversity). Morrissey thinks that these criticisms miss the point since, the fund is not aimed at a particular or narrow constituency" but is intended instead to have "a broad appeal".
In any case, "by using a negative screen to exclude whole sectors (where there is no specific ethical mandate), we might miss the opportunity to influence how they evolve and so create more sustainable businesses and long term value". She points to the example of the traditional energy companies who "are now embracing renewables". By continuing to hold shares in these companies, "we can continue to keep up the pressure through our shareholdings". Similarly, keeping a handful of shares in firms that have a poor record on diversity will help the fund "engage with and influence those that have the most scope for improvement".
Moving from her new fund to markets as a whole, Morrissey is cautious, saying that, we are clearly at a "cup half full" moment as far as market levels are concerned. She acknowledges that so far shares "have largely brushed off" any doubts about them. However, in the longer run she thinks that, "we still have major structural imbalances, including a lack of fiscal manoeuvrability and widening wealth and income inequality". Indeed, "the necessary policy response to the financial crisis a decade ago ended up fuelling these issues rather than addressing them". At the very least, investors need to keep a "watchful eye" on such risks.