Jason Baron uses an unusual metric for sizing up stocks: women. From his perch at U.S. Trust in Boston, Baron works in a small but growing part of the money-management business that’s trying to sell the idea that when it comes to investing, gender pays. The basic argument, backed up by research, is that companies with a relatively high percentage of women in power perform better than those dominated by men.
Traditionalists may scoff, but many of the half-dozen or so women-focused funds and investment strategies — a tiny slice of the $6.6 trillion socially responsible investing world — have been standout performers.
Baron’s Women & Girls Equality strategy, offered to private banking clients, outperformed its benchmark in 2013 and 2014, though it’s slightly under so far this year. Several global mutual funds with a similar emphasis were bringing in double-digit returns until the recent market swoon.
Whether concentrating on women, the environment or human rights, a socially responsible approach provides a way to match money with conscience. But for many, the question is whether so- called gender-lens investing is about making a difference or a profit: At least one female-focused fund doesn’t even pretend it’s picking stocks to promote women in management, instead looking at companies that make products mostly women buy, such as cosmetics.
Managers including Baron and Eve Ellis, who runs Morgan Stanley’s Parity Portfolio, say they’re winning converts with their approaches. They point to a decade’s worth of studies, notably McKinsey & Co.’s first Women Matter report in 2007, that suggest there’s money to be made in stocks of companies with a lot of women in top jobs. When gender-lens stock picking is done the right way, Ellis says, “you don’t need to sacrifice financial returns for social returns.”
Millennials are helping drive the general trend, with 70 percent saying they’d be likely to make investments based on social issues, such as gender equality, according to a 2013 study by Calvert Investments Inc. And U.S. Trust data show that 71 percent of high net-worth women consider socially responsible criteria when deciding where to put their money.
“It’s not just the Birkenstock-wearing Colorado liberals anymore,” says Jackie Vanderbrug, a senior vice president at U.S. Trust; a version of its Women & Girls portfolio for wealthy clients is available for a minimum $100,000 investment through parent Bank of America Corp.’s Merrill Lynch.
Most of the funds try to capture the types of returns the McKinsey report says women in leadership roles can bring. But in South Korea, UBS Hana’s She&Style concentrates on companies that make “products appealing to female consumers,” including cell phones and makeup.
That approach is “really kind of a stretch” to include in the gender-lens investing world, says Barbara Krumsiek, senior industry fellow of Georgetown University’s Women’s Leadership Institute and a former chief executive officer of Calvert. That might not matter to everyone: She&Style has earned an 18 percent return this year, with holdings including Amorepacific Corp., a maker of skin-care products, and Hanssem Co., which makes kitchen furniture.
The grandmother of women-focused funds, Valeurs Feminines, was created in 2005 by France’s Conseil Plus Gestion, a boutique money-management firm. It picks mostly from European companies with plenty of top female directors or managers or whose business has “a strong female connotation,” says Jean-Louis Hostache, CPG’s CEO.
Among major holdings at the end of June were advertiser Publicis Groupe SA, whose chairman and six of 15 other directors are women, and insurer Axa SA, where the chief operating officer and five of 14 board members are female. But Hostache and CPG fund manager Caroline Grinda also buy stakes in companies like Etam Developpement SA, a lingerie retailer whose shares are up about 25 percent this year. “We thought it would be a shame not to profit from the increasing economic power of women,” Hostache says. Valeurs Feminines has outperformed its benchmark, the Eurostox 50, by about 70 percent since its inception.
The gender lens isn’t for everyone. BlackRock Inc., which lobbies companies to name more female directors and manages several socially responsible investments, doesn’t offer any focused on women. Michelle Edkins, global head of corporate governance, says there isn’t yet “a framework that is consistent and scalable” to guide this kind of investing if the goal is more than just solid returns.
While gender diversity can be a sign of a well-managed company, “causation is the difficult thing to prove,” Edkins says. Is a company diverse because it’s well-run, or well-run because it’s diverse?
The number of women in top roles may not reflect how companies treat all female employees, so stock-picking based on such statistics is “simplistic — it’s really surface-level investing,” Georgetown’s Krumsiek says. “It doesn’t necessarily mean they’re doing good things for all women.”
At U.S. Trust, Baron digs deeper for the Women & Girls investment strategy. Beyond looking at the number of women in executive positions, he considers whether companies are selling or sourcing products in countries where women aren’t fully participating citizens “or where girls are sold to pay for boys’ school fees.”
Other metrics include whether a company portrays women responsibly in advertising, promotes women and pays a living wage. Baron also looks at products that help women in developing economies, including solar-powered lights or stoves — “I’m not talking about pink laptops.” Only about 125 companies out of the S&P 1500 survive. “They also do tend to be pretty good performers,” he says.
In the U.S., the newest fund to enter the market is the year-old $80 million Pax/Ellevate Global Women’s Index Fund, managed by Pax World Management LLC for former Bank of America and Citigroup executive Sallie Krawcheck.
It selects companies with women directors and top managers that have signed the United Nations Women’s Employment Principles accord. Starting with the 1,600-strong MSCI Index, it found a universe of 400 from which to choose, says Joe Keefe, president and CEO of Pax World.
The top 10 holdings include Key Corp., Pepsico Inc. and even defense contractor Lockheed Martin Corp. — all led by women. No Japanese company is represented, and male-heavy tech companies like Apple Inc. don’t make the cut. The fund has outperformed its benchmark this year.
Barclays Bank Plc has a completely different approach, with an exchange-traded note that mathematically tracks the bank’s Women in Leadership index of companies that either have 25 percent women on their board or a female CEO.
But investors aren’t putting money directly into those companies, because the note doesn’t buy the stocks in the index; it replicates their performance with a formula. Marketed to asset managers who can sell it to retail clients, the note has underperformed the S&P 500 index this year.
Female-focused funds are small — for the most part with less than $100 million under management — but will grow as socially responsible investing continues to gain traction, says U.S. Trust’s Vanderbrug.
In the next few years, “we’ll have better metrics,” says Lisa Woll, CEO of US SIF, the Forum for Sustainable and Responsible Investment. “This field is going to evolve a lot.”
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