April 13, 2024

Diverse investment teams lead to far better investment outcomes

5 min read

As organisations and businesses globally start to adopt and implement the 17 United Nations Sustainable Development Goals (SDGs) to mitigate some of the world’s biggest challenges, there is a strong case to be made for the correlation between diverse investment teams that include women portfolio managers and consistent performance.

This is evidenced by a study done earlier this year by Willis Towers Watson analysing several investment strategies globally – “Diversity in the asset management industry: on the right track, but at the wrong pace” – that an investment team with greater gender diversity can add 45 basis points per year in net excess returns.

However, global and local progress toward building diverse teams remains glacial, highlighting that industry participants are not yet sufficiently convinced of how important diversity is in achieving superior investment outcomes on behalf of clients. Thus, female representation in investment decision-making remains low and the pipeline of women eager to pursue a career in asset management is dwindling.

These challenges were highlighted in the Eskom Pension and Provident Fund/Gordon Institute of Business Science Diversity in Asset Management Survey released in July, which set out to uncover why the industry wasn’t capitalising on the transformative role women have played in the industry for the past two decades by developing sustainable solutions to clients’ funding problems, reducing costs and simplifying products, decision-making and services.

Instead, as the latest 27Four BEE.conomics Survey found, there are still many more male than female portfolio managers. The EPPF/GIBS survey quantified the extent of the challenge: Of the 140 women in non-administrative professional roles, only about 12 were portfolio managers or chief investment officers.

The problem is not just a South African one – it’s a global one. A recent study by Hendrick & Struggles found that only 20% of executive teams and board members at the world’s top 50 asset managers were women. Even more worrying is that the percentage of women fund managers has stagnated at 14% for almost two decades, according to Morningstar research

This slow progress isn’t because of a lack of trying – women tend to be better represented in investment analyst roles, and women graduates outperform their male counterparts in relevant university degrees. But that’s where it seems to end, with many women graduates opting to pursue careers in other segments of the financial services industry and few of those who have become investment analysts advancing into the industry ‘power seats’.

The reality is that until the industry genuinely acknowledges that females and diverse teams more broadly result in better investment outcomes, the progress in the industry will likely remain disappointing. The EPPF research report aptly encapsulates this challenge: “It’s really not about men versus women or other demographic markers. Rather, it’s about recognising and valuing how differentiated levels of problem-solving, information processing and implementation combine with differentiated social experiences to contribute a far more effective decision-making process.”

The research finds one of the problems is that the investment industry relies on criteria that are too narrow when identifying investment talent. Talent managers predominantly require candidates who have superior mathematical skills and CFA qualifications. Better progress is likely to be made if the criteria were broadened to include social, psychological, environmental and developmental skills. With the increase in artificial intelligence and data science-enabled investing, specialist skills in these fields will also contribute to skills diversity in the industry. 

But widening the skillset alone is not nearly sufficient to solve the problem. Unless investment managers and their investment teams across the industry genuinely welcome diverse thinking, backgrounds and skills and are ready to embrace a meeting of minds with female and others who have not traditionally been represented in the investment industry, change is unlikely to happen. 

What would hasten this shift? The South African investment industry’s experience with black economic empowerment (BEE) over decades highlights that the diversity of the industry is unlikely to change unless there is some form of external pressure to do so. One option is to introduce official targets, as has been the case with BEE scorecards. Another is pressure from clients to build diverse teams to manage their money because they believe this would deliver better outcomes. 

The latter is conceivable in an environment where there’s a shift toward ‘purposeful capitalism’ – generating good financial performance while also making a meaningful social difference – highlighted in the research report. The report revealed that clients want more from their investment managers than only a focus on profits and performance track records, and instead expect to see them generate sustainable investment solutions. 

This perceived emphasis on investment performance alone also addresses another, arguably more pressing, challenge to achieving gender equality in the industry: not enough women are considering investment management as a viable and meaningful career. The research report correctly highlights that the industry has a reputational problem and that addressing this requires “a major marketing effort to change its image as a desirable profession with the power to make meaningful changes in South Africa.” 

At Prescient, we have seen a steady increase in the number of female employees within the business. In 2019, our female employees made up some 43% of the South African business and to date now comprise over 50%. Our women in leadership have grown by over 10%, from 27.9% to 38.3%. The number of new hires for 2023 comprises 65.2%, indicative of our commitment to building diverse teams within our business.

The SDG 5 – Gender Equality – interlinks with other SDGs of no poverty, decent work and economic growth, showing the impact of ‘investing’ in women. As allocators of capital, the challenge for the financial market is that we can’t solve all market failures with market-based solutions. If we have real alignment with SDGs, then that’s sustainable good business. Recognising that we can’t have maximum returns with no safeguards was highlighted by the pandemic when inequalities in health, social and environment were glaring.

Cheree Dyers

Chief Executive Officer

Prescient Investment Management

Prescient is currently running a social media campaign #InvestInHER to highlight the opportunities and growth for women in the investment industry. Click here for more info.

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