Gender equality fund performance disappoints

For investors hoping to make good returns by investing in funds focused on companies that emphasise gender equality it has been a difficult time.

As the FT’s Alphaville recently reported, companies that score highly on the Morgan Stanley Holistic Equal and Representation Score (HERS) screen last year delivered their worst relative performance since 2011.

The performance data must be confusing for those who less than 18 months ago were reading Morgan Stanley research which claimed that based on the HERS ranking, gender diversity “keeps paying dividends”.

Data from Morningstar, which looked only at funds, including exchange traded funds, that claim to have a gender equality tilt, suggests that poor performance has been a longer-term tale than simply a bad 2023.

Year-to-date, only about a fifth of gender equality funds managed to outperform their relevant Morningstar benchmark, a figure that sinks to less than 10 per cent over a three-year time period and is only marginally higher at 11 per cent when viewed over five years.

Fund closures are now outnumbering launches, with three closures this year versus only one launch, and six closures last year compared with three launches.

Investors have responded accordingly, with net inflows beginning to turn negative as long ago as 2022.

For Kenneth Lamont, senior research analyst at Morningstar, investors should think about the data the funds are using and ask questions around its suitability as a “sustainable” investing factor given that data reporting is voluntary, that there can be uncertainty over the quality of historical data and finally that sector and geographical constraints will contribute heavily to investment returns.

Lamont identified four broad themes that gender equality funds tend to emphasise: the percentage of women in leadership roles; equal pay and opportunities; female-friendly policies such as flexible working; and transparency (the companies might be signatories of the UN Women’s Empowerment Principles, for example, and publish gender pay information).

It is easy to see how these lenses could begin to introduce confusion. A company could commit to increasing the number of women at the top of the organisation and make consistent moves towards ensuring its employees have equal pay and opportunities, but it might still score low on its current metrics.

Similarly, not all funds try to do the same things. Some look only at women in leadership positions, hoping to gain advantages from evidence that women tend to, for example, make different financial decisions to men.

However, Diana van Maasdijk, founder and chief executive of Equileap, one of the leading providers of gender equality diversity and inclusion data, said simply looking at metrics for women in leadership does not provide a full enough picture to construct an index that will deliver outperformance.

“Having a few women on top does not mean you are necessarily building better companies,” she said. Equileap, which has just launched the Solactive Equileap Emerging Markets Gender Equality Index to accompany its developed marked family of indices, also looks at supply chains and policies such as parental leave.

But, as Lamont explained, it is hard to determine which metrics will deliver outperformance. Certainly, many of the funds have failed to live up to their early hype.

He pointed to the example of the largest gender ETF globally, the $779mn Europe-domiciled UBS ETF (IE) Global Gender Equality UCITS ETF (GENDED), which launched in 2017.

At that time a UBS strategist said: “Our research indicates that gender diverse companies tend to outperform on various profitability measures” and have “the potential to achieve strong returns”. This fund has lagged behind the MSCI World Index by 16 percentage points cumulatively since inception, Lamont said.

“If gender strategies have a place it is to reward companies with positive gender metrics, but investors must understand this may come at a cost,” he added.

Some in the industry have speculated openly over whether the declining interest in gender lens investing is a symptom of a broader “war on woke”.

However, Cinthia Murphy, investment strategist at VettaFi, said she could see no evidence of any backlash.

She pointed out that just a handful of companies had driven US market returns in recent months, most of them tied to technology and the AI craze.

“In this environment, stock and sector differences make a big difference on results, which says little about views on gender equity, if at all, and a lot about how narrow market leadership has been.”

Where individual gender funds have performed well, she argued, it is because they had similar exposure to indices that have also performed well.

Murphy pointed to the SPDR MSCI USA Gender Diversity ETF (SHE), which has delivered returns of 26.2 per cent over the past year vs 26 per cent for the SPDR S&P 500 ETF Trust (SPY).

“It’s outperforming the S&P 500 in the past year, and year to date, it’s toe to toe with the index. If you look at portfolio composition, SHE has the same sector weightings as the S&P 500,” she said.

One issue, as for many funds that promise to beat the broad market, is fees. SHE, for example, has a total expense ratio of 0.2 per cent vs SPY’s 0.09 per cent.

Lamont said while collection of environmental, social and governance data could help to drive positive change, from a returns point of view, he asked: “Why not just invest in a low-cost index fund and use the difference to gift to women’s charities?”

Letter in response to this article:

Equality funds falter when they lack context / From Mary Ellen Iskenderian, President and CEO, Women’s World Banking, New York, NY, US