The number of women in the financial industry has been and remains remarkably low.
According to a recent Morningstar report, women manage less than 2% of mutual fund assets. Nearly two thirds of the top 71 Silicon Valley venture capital funds have no senior female investment professionals, according to the Social & Capital Partnership.
Within hedge funds, my research has shown roughly an 80:1 male to female ratio. In fact, there are 11 male hedge fund managers named John, James, William or Robert for every one female hedge fund manager of any name.
In the largest private equity firms, there are six men named John, James, William or Robert and zero female private equity leaders. Even in relatively “popular” female roles like registered investment advisors and certified financial planners, the numbers are still abysmal. Less than 30% of RIAs and less than 23% of CFPs are women.
And while financial industry problems may garner little sympathy these days, this is an issue that impacts everyone from Wall Street to Main Street, because the lack of women is making us all poorer.
It may seem like a stretch to say that gender diversity (or lack thereof) can directly impact your wallet, but it is, in fact, true. Research shows that the lack of women on Wall Street may be negatively impacting investment returns, diversification and volatility, economic expansion and jobs. Don’t believe me? Take a look at the research.
Performance: My 2012 and 2013 research for the Rothstein Kass Institute showed that women-run hedge funds outperformed the hedge universe at large by a margin of six percentage points over six and a half years. A 2015 study by Kyria Capital highlighted that women-run hedge funds are more likely to produce top-quartile performance.
Although a June 2015 Morningstar study was less conclusive, it did reveal a slight edge for mixed gender teams, and research from TD Direct showed that five of the top 25 performing mutual funds over the last 10 years were run by women, despite under-representation in the sample. In fact, even among Main Street investors, studies of brokerage and retirement accounts revealed similar findings. No matter where you look, it appears to pay to invest ‘like a girl.”
However, the number of female-run funds remains incredibly small, which means that many investors simply don’t have access to this outperformance. Even if the return differential is at the lowest end of the study spectrum, the power of compounding means many investors are missing out on meaningful gains.
Diversification and market volatility: While researching my book “Women of The Street: Why Female Money Managers Generate Higher Returns (And How You Can Too)” I determined that men and women’s biology and cognitive processes were dissimilar enough to create diversified investment behavior. From disparities in overconfidence, probability weighting, trading behavior, to maintaining conviction in the face of market noise, men and women simply approach investing differently.
Most investors will agree that behavior impacts investment performance. Billionaire Seth Klarman once said that “Investing is the intersection of economics and psychology,” and it seems increasingly undeniable that that statement is true. Whether it’s the behavior of the individual investor, the investment advisor with whom they work, the money managers to whom they allocate or even the broad market, macro-economic behavior (like the “January effect” or market bubbles such as the tech wreck), behavior matters.
So if we diversify portfolios by geography, liquidity, number of investments, asset classes and other factors, why don’t we also consider diversification from a behavioral and gender point of view? At an individual portfolio level, an investor with both male and female fund managers can potentially mitigate the risk associated with having only one dominant behavioral pattern.
On a macro level, at least one study published in the American Economic Review showed that having more women on Wall Street could reduce overall market volatility. For those individuals who lived through the sharp market declines of 2008, I’m betting that less volatility, particularly on the downside, would be welcomed not only by investors, but also by the individuals who were impacted by the inevitable economic ripple effect caused by the sell-off.
Economic expansion and jobs: In July, First Round Capital found that, across 300 of their portfolio investments, companies with at least one woman founder performed 63% better (as measured by valuation) than all-male teams. The Ewing Marion Kauffman Foundation similarly found that women-led technology companies have a 35% higher return on investment and generate revenues that are 12% higher than all-male firms.
According to an American Express Open study published in September this year, there are now 9.4 million female-owned companies, which represent 30 percent of total U.S. businesses and account for one out of every seven jobs in the United States. Companies owned by women are increasing at one-and-a-half times the national average, and more than 800 launch every day. From 1997 to 2012 (the most recent period for which there are numbers), the National Women’s Business Council reports that women-run firms have continuously created jobs, 510,939 positions to be exact, and increased the number of employees by 19.5%, compared with 11.5% for male-owned firms.
And yet, a Babson College study revealed that only 2.7% of the venture capital allocated between 2011 and 2013 went to firms with female CEOs. 2015 has seen more capital flow to female founded firms, but the year-to-date number still lags at a mere 14%. The dearth of women within the ranks of venture capital and private equity firms mean that women-led job, economic expansion and revenue creation opportunities may be limited by lack of access to capital.
So while some may feel like gender diversity is more of a social issue, it seems clear that there are serious economic repercussions for all of us if we maintain Wall Street’s status quo.
Author: Meredith Jones, Alternative investment consultant and author of Women of The Street: Why Female Money Managers Generate Higher Returns (And How You Can Too)
Image: A woman holding an umbrella walks in front of an electronic board displaying various countries’ stock price index outside a brokerage in Tokyo June 24, 2015. REUTERS/Issei Kato