Gender and investing is a sensitive subject. I have a lot of conversations with industry participants about why diversity is good for the financial industry and why diverse managers, particularly women, exhibit strong outperformance. These conversations invariably start off positively (“tell me more”), but often end up someplace altogether different.
One of the most common ways these conversations fall off a cliff is when I hear something like the following:
“Don’t you think that the reason women generate better returns is because it’s been so hard for them to get to be money managers and that, as a result, only the best and the brightest have made it? When there are as many mediocre women in the industry as there are men, performance will normalize.”
I have actually heard this last sentence verbatim, so indulge me for a moment while I set the record straight.
It has historically been difficult for women to climb up the ranks of finance and investing to open their own hedge, private equity, venture capital, and long-only funds. And, yes, there is a relatively small sample of those professional money managers to study, which may explain why this research was necessary in the first place. Perhaps the day will come when a mediocre woman will have the same opportunities in investing as an average man. I will dance on the front steps of the New York Stock Exchange if and when it does.
The fact is, however, professional investors are not the only pool of women on whom behavioral investment research has been done. Many of the largest and most statistically relevant studies that demonstrate gender outperformance have been done on pools of retail investors.
The Barber and Odean study, “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” was based on data from 35,000 household accounts at a discount broker, and found that women tended to outperform men by a margin of roughly 1 percent per year. And while I’m sure some of the women represented therein may have been “the best and the brightest,” it seems unimaginable that only the top performing women were represented in this study, while the male sample included both the cream of the crop and the cream of the crap. The same goes for Vanguard’s research on 2.7 million IRA accounts and other large-scale studies.
The truth is, diversity investment research challenges the way things have “always been done.” Discussions like this are disruptive, and while we’ve clearly gotten used to disruptive innovation when talking about ride shares and Airbnbs, it isn’t as comfortable when we’re talking about the cognitive and behavioral characteristics of human capital.
I don’t think we should create a new category of gender-specific statistical bias: the best and brightest bias. The cognitive and behavioral alpha created by women is real, and it merits discussion, investigation, emulation, and investment. The returns alone deserve attention. When you consider the diversification benefits of investing with diverse managers, these things become critical.
Homogeneous groups tend to think alike. They also tend to overestimate their problem-solving skills and consider a narrower range of information. They may also be less open to new ideas. And there are fewer areas in business more homogenized than in investment management.
So I’d like to suggest that we expand our definition of diversification. Maybe it’s not all about the asset allocation mix of stocks, bonds, futures, real estate, and other asset classes. Perhaps it’s not even the number of funds you invest in or the mix of strategies you have. Maybe, just maybe, diversification includes the way in which the money managers collect, interpret, and evaluate market data, and the cognitive alpha they create for you.
And, for the record, I am not advocating that investors choose only women money managers. Investing solely with any singular group is the very antithesis of diversification. I am suggesting that you look for a variety of sources of cognitive and behavioral alpha, either within your portfolio of money managers or within yourself.
From Women of the Street: Why Female Money Managers Generate Higher Returns (and How You Can Too) by Meredith C. Jones. Copyright © 2015 by the author and reprinted by permission of Palgrave Macmillan, a division of Macmillan Publishers Ltd.
About the Author
With more than sixteen years of experience, Meredith Jones is an internationally recognized researcher, writer, speaker, and expert in the alternative investment industry. She has held executive positions at Van Hedge Fund Advisors, PerTrac Financial Solutions, and was Director at Barclays Capital Strategic Consulting Group. Jones is best known for creating industry-leading hedge fund research. She has presented her original research and insights to industry participants around the world and has had her findings published in books, journals, industry publications, and international media outlets, including the Economist, the New York Times, CNBC, the Wall Street Journal, the Financial Times, the Journal of Investing, and others.
