Jeff Benjamin

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Gender-focused investment strategy skips over common sense

$1.4 billion TAMP seizes on an opportunity, but its strategy seems ill-conceived

Oct 14, 2015 @ 1:54 pm

By Jeff Benjamin

We can agree that gender equality in both politics and the asset management industry is getting closer attention, but that doesn't mean you can just throw anything against the wall and see if it sticks.

But that appears to be the case with a new strategy from EQIS Capital Management.

Give some credit to the $1.4 billion turnkey asset management platform for seizing on an opportunity, but its strategy of only investing in companies with female chief executive officers seems a little extreme and ill-conceived.

“Research has shown that women are better investors than men because they are not as cocky,” said Kenneth Kim, manager of the brand new EQIS separately managed account known as the Women CEOs Focus Portfolio.

Beyond simple gender-based generalizations, there is a growing body of research on gender diversity in corporate boardrooms and investing through what has been dubbed a “gender lens.”

NON-FINANCIAL METRICS

“There are serious non-financial metrics that are important, and evidence shows that a gender lens is not just about social returns, it's also about financial returns,” said Eve Ellis, a financial adviser and portfolio manager in The Matterhorn Group at Morgan Stanley.

Ms. Ellis helps manage the Parity Portfolio, which is similar to the EQIS portfolio in that it applies gender screens in constructing a separate account.

She cites compliance rules for not being able to divulge the total assets or the performance of the two-and-a-half-year-old portfolio, but said it does include 43 companies that met the criteria of having at least three female corporate board members.

When the Parity Portfolio was launched in 2012, there were just 250 companies in the Russell 3000 Index that met the fund's initial screening criteria. That number has since increased to 300, still just 10% of the Russell 3000.

In boardrooms of the companies that make up the S&P 500 Index, just 19.2% of board members are women. That's up from 16.9% three years ago, according to Ms. Ellis.

“Over half the college graduates in this country are women,” she said. “We need companies that are interested in tapping into the talents of half the population.”

SCREEN TOO NARROW?

Excellent points, and that clearly is the bandwagon that the folks at EQIS are hoping to get on. But it still begs the question of whether the screen on this particular strategy is too narrow.

Starting with a universe of the Fortune 1000, Mr. Kim found fewer than 50 companies with female CEOs. After the application of some basic fundamental research on those companies, the list was narrowed to fewer than 20 stocks making up the portfolio.

While the portfolio includes many large and respected companies, including IBM, General Motors, Yahoo and Xerox, there isn't even a simple performance back-test to show how the strategy might perform.

“I simply think that women are more levelheaded, more conservative when they make decisions, and they're not the excessive risk takers that men tend to be,” Mr. Kim said. “This is purely based on their gender; I'm not going to try and figure out which woman CEO will be better than another woman CEO, I'm hoping that the averages will work out.”

It has been easy for a long time to make the case for improving gender diversity and equality, but screening specifically for something like a female CEO seems as risky and wrongheaded as screening for a male CEO.

“It makes the single most important thing about their executive capacity the fact that they are a woman,” said Bob Rice, chief investment strategist at Tangent Capital.

“I think it's anti-feminist to say that the most important element of a CEO's leadership role is that she's a female,” he said. “When it comes to women executives, there are good ones and there are bad ones, just like men.”

Even if the EQIS strategy seems a tad too narrow in scope, it could still gain some traction in the same way other social and religious screens appeal to certain investors.

DIVERSITY OF THOUGHT

“Globally, 77% of women want to be investing in companies with gender diversity on the board,” said Kathleen McQuiggan, senior vice president of women's strategies at Pax World Management.

“I think this is a conversation going on globally; you want that diversity of thought,” she added. “You're seeing many of the leading companies come to realize that gender diversity can increase operating performance and introduce different risk management.”

Ms. McQuiggan is also managing director of the $79 million Pax Ellevate Global Women's Index Fund (PXWIX), which invests in the world's 400 highest-rated companies for advancing women into leadership roles.

“The research does point to the positive benefits of when you have a critical mass of women in leadership,” she said.

The index fund is down 1.28% so this year through Tuesday, but is up 5.25% over the past 12 months. That compares to the S&P 500, which is down 1.09% this year and up 9.12% over the past 12 months.

While Ms. McQuiggan believes the appetite for gender-lens investing is growing, she noted that financial advisers in general have been slow to get on board.

Part of the reason for that might be the gimmicky nature of some of the strategies.

“I don't care if a CEO is male, female, white, black, Hispanic, tall, short, skinny or fat; I only care if they can be successful,” said Paul Schatz, president of Heritage Capital.

“I'm not a fan of gender-based investing, because I think men and women have equal intelligence,” he said. “The plumbing may be different, but men and women have the same ability to lead a company.”

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