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Is gender an alpha generator?

Is gender an alpha generator?

Dinosaurs are alive and not at all well, judging by both the recent revelations of widespread sexual harassment and the subsequent criticism of victims from some quarters.

Coincidentally, Lyxor has just launched Europe’s first Global Gender Equality ETF. With a total expense ratio of 0.35%, it will track an index developed by Equileap and Solactive.

Because you’re worth it

The portfolio will consist of 150 large-cap stocks from across 23 developed markets that rank highly on Equileap’s Gender Scorecard, based on criteria inspired by the UN Women’s Empowerment Principles such as gender equality in corporate leadership, professional development for women, and community initiatives and advocacy.

In its 2017 report, the top companies were L’Oreal, Pearson, and National Australia Bank.

Lyxor claimed that this index had outperformed global equities generally by 10.7% over the past six years. Sadly, though, that runs counter to the experience of other gender-focused ETFs already listed in the US.

State Street’s Gender Diversity Index ETF – which invests in US large-caps that exhibit gender diversity in senior leadership positions – has for example returned just 17% since inception in March last year compared with 28% from the S&P 500.

The Barclays Women in Leadership ETN, launched in 2014 to hold firms that must among other requirements have a female CEO and/or women forming at least 25% of their board, has also failed to outperform the S&P 500.

That these are US focused whereas the Lyxor ETF will have a global mandate may explain some of the disparity, as will the choice of timeframe, and the underlying sector exposures will have an impact relative to the parent universe too.

Diversity indices tend to have greater weightings to healthcare and consumer categories, for instance, and less in financials and energy.

The scholarly approach

The academic literature on gender diversity and stock performance is inconclusive too, however: earlier this year Wharton management professor Katherine Klein reviewed the field and found that while reports by banks and consultancies tended to detect share-price benefits from gender diversity, more formal investigations did not replicate these results.

‘Rigorous, peer-reviewed studies suggest that companies do not perform better when they have women on the board,’ Klein observed. ‘Nor do they perform worse. Depending on which meta-analysis you read, board gender diversity either has a very weak relationship with board performance or no relationship at all.’

This will of course be smugly received by those who instinctively reject diversity as a goal and promote instead what they deem meritocratic systems that just happen to reward white men disproportionately.


Some – probably those who complain about International Women’s Day, forgetting that there is in fact an International Men’s Day – may even wonder whether, if there are ETFs devoted to having more women in boardrooms, there shouldn’t also be ‘men’s ETFs’.

Well, earlier this year Ming-Tsung Lin of De Montfort University and Ser-Huang Poon of the University of Manchester provided an answer within a broader paper.

By reversing the methodology of State Street’s Gender Diversity index, which has the ticker SHE, they created a ‘HE’ index of stocks by choosing the businesses with the lowest female board ratio within each sector until the total market capitalisation of the selected names reached 10% of the full market capitalisation of that sector.

Neither the HE portfolio nor any of the female-biased indices they monitored delivered any statistically significant alpha, although the HE index did suffer higher idiosyncratic volatility and was particularly badly hurt by the credit crisis.

In short, then, gender is not an investment factor to sit alongside momentum or value. That nevertheless does not mean the passive industry should ignore it, and to its credit it is not.

Actively passive

So far in 2017 BlackRock has stated that it will ‘engage companies to better understand their progress on improving gender balance in the boardroom’.

State Street has also confirmed that it is ‘trying to drive board diversity through an active dialogue and engagement with company and board leadership’, and Vanguard chairman and chief executive officer Bill McNabb told public corporations’ directors that ‘gender diversity is one element of board composition that we will continue to focus on over the coming years’.

These words are increasingly turning to action. According to analysis by Proxy Insight, Vanguard has supported a ‘board diversity’ report in 80% of its shareholder votes this year.

Such initiatives may not demonstrably improve returns – or weaken them – but they should be welcomed.

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