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Investing in Firms With Female Leaders

These two funds follow gender-diversity indexes.

Jon Hale, 04/10/2017

Even though women make up more than half of the U.S. workforce, they remain significantly underrepresented on corporate boards and in the ranks of corporate executives. Just 5% of S&P 500 companies are headed by a female CEO; 20% of board seats are held by women; and 25% of executive and senior level managers are women.1 A 2016 Government Accountability Office report on female directors of companies in the S&P 1500 found that women account for just 16% of corporate board members and estimated that, if women started joining boards as often as men today, it would take another 40 years for women to reach parity.2

These numbers by themselves are sufficient to conclude that companies need to move faster to place more women in management and leadership positions. This, in turn, would likely speed progress on gender-related workplace issues, such as pay equality, career-pathing, diversity, and work-life balance. More broadly, research suggests that gender diversity can improve decisionmaking. According to Columbia Business School professor Katherine W. Phillips, socially diverse groups are more innovative because their members’ different backgrounds bring new information to the table, and because “simply interacting with individuals who are different forces group members to prepare better, to anticipate alternative viewpoints and to expect that reaching consensus will take effort.”3

Recent research by Credit Suisse, RobecoSAM, and Morgan Stanley has shown that companies with more women in management and on boards, as well as those with better gender diversity reflected throughout their businesses, tend to outperform companies with fewer women in management and lower gender diversity.4

By investing in such companies, investors can achieve impact by helping shine a light on gender issues while also achieving competitive, if not better, investment returns. That was the view of the $200 billion California State Teachers’ Retirement System, which committed $250 million to seed the SPDR SSGA Gender Diversity ETF SHE in March 2016, with plans to eventually double its allocation. In addition to SHE, which is focused on large-cap U.S. stocks, Pax Ellevate Global Women’s Index PXWIX invests in developed-markets stocks, including those of the United States. These two funds, plus a Barclays-sponsored exchange-traded note (Barclays Women in Leadership WIL), are the only public offerings focused on investing in a gender-aware manner, although most funds that actively incorporate environmental, social, and governance, or ESG, factors into their investment process include employee diversity policies and board composition as considerations.

SHE and PXWIX: Under the Hood
Both funds are broadly diversified funds appropriate for a U.S. (SHE) or global (PXWIX) large-cap allocation. Both track specially designed indexes with similar but not identical criteria for inclusion. They also use different rules for portfolio construction. As a result, their sector compositions differ and they have fewer common holdings than one might expect. PXWIX has a broader global mandate than the U.S.-focused SHE, but if we consider only the U.S. holdings of PXWIX, the two funds share just 49 names out of 352 holdings domiciled in the United States.

Starting with a universe of the 1,000 largest U.S. companies by market capitalization, the SSGA Gender Diversity Index, upon which SHE is based, ranks companies within each of 10 sectors based on their ratios of women on the board and in executive leadership positions. For each ratio, companies representing the top 10% of market cap within each sector are eligible for inclusion, but only if they have a female CEO, board chair, or member of the board. The resulting index has 186 holdings, less than 20% of holdings in the starting universe. Without additional sector or position constraints, the index has large individual positions. Pfizer PFE, the largest position, takes up more than 6% of assets. The index is significantly overweight healthcare and, to a lesser extent, industrials, and is significantly underweight technology.

PXWIX is based on the Pax Global Women’s Leadership Index, which uses the MSCI World Index as its starting universe. The Pax World Gender Analytics team evaluates companies based on the ratios of women on the board and in executive management, whether a firm has a female CEO or CFO, and whether a firm is a signatory to the Women’s Empowerment Principles, which encourage businesses to promote gender equality in the workplace, marketplace, and community. Companies must also meet certain ESG standards and firms involved in weapons or tobacco manufacturing are excluded altogether. The resulting index has 405 holdings, about 25% of the number of holdings in the MSCI World Index, with about 65% of assets in the United States. The ESG criteria help PXWIX earn a Morningstar Sustainability Rating of High based on its underlying holdings. By contrast, SHE has a Sustainability Rating of Above Average.

Factor Differences
Using the Morningstar Global Risk Model, we can further evaluate the differences between these gender-aware investments and their conventional benchmarks. E X H I B I T 1 highlights the sector exposures relative to each fund’s investment universe. Investing in SHE results in significantly more exposure to healthcare than the Russell 1000 Index and less exposure to technology. SHE has slightly higher exposure to consumer cyclicals and slightly lower exposure to energy than the Russell 1000 Index. PXWIX, on the other hand, has significantly more exposure to the consumer defensive sector and less exposure to energy than does the MSCI World Index. It also has less exposure to the Developed Asia- Pacific region.

Jon Hale is a consultant with Morningstar Institutional Investment Consulting.

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