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Why Diversity and Inclusion Matter to Investors

Morningstar’s new empowerment indexes display strong investment characteristics

Dan Lefkovitz


These days, it’s common to hear organizations of all types, businesses included, articulate a commitment to “diversity and inclusion”—varied representation across dimensions of race, ethnicity, gender, sexual orientation, ability, etc. For some, it’s all about values. Equity, access, and an accurate reflection of the complexion of society are invoked.

But there’s also evidence that diversity and inclusion are good for business. McKinsey and Credit Suisse have produced research showing that companies serious about diversity and inclusion achieve superior financial results. Different perspectives improve decision-making. Customer alignment, brand building, and talent acquisition and retention also benefit.

A growing cadre of investors care about diversity, inclusion, and other factors falling under the heading of “sustainability.” Financial advisors and asset managers are taking notice. The good news is that considering diversity and inclusion in investment selection leads to strong and stable businesses. The constituents of the recently launched Morningstar® Minority Empowerment Index™ and Morningstar® Women’s Empowerment Index™ score well on measures of volatility, competitive advantage, and financial health.

How to build a diversity and inclusion-focused index

The Morningstar Minority Empowerment Index selects companies based on research from Sustainalytics, whose ratings also power the Morningstar® Sustainability Rating™ for funds. The index targets 200 large- and mid-cap U.S. stocks, emphasizing companies with a commitment to racial and ethnic diversity within their workforce, board, supply chain, and society at large. The strength of the corporate discrimination policy is assessed.

The Morningstar Women’s Empowerment Index also targets 200 large- and mid-cap U.S. stocks, but research is provided by a specialist gender researcher called Equileap. Among the 19 inputs are gender balance within corporate leadership and the workforce, equality of compensation, policies relating to parental leave and sexual harassment, and a company’s legal record on gender issues.

Both indexes are designed to deliver a similar risk/return profile to the large- and mid-cap segment of the U.S. equity market. So, constituents are weighted by market capitalization and sector deviation is minimized.

Dimensions of diversity tend to align

Overlap between the two indexes is considerable. In fact, their top four constituents as of Nov. 30, 2018, are identical:

  1. Microsoft
  3. Johnson & Johnson
  4. JPMorgan Chase

The fact that familiar household names dominate the indexes is unsurprising. First, market-capitalization weighting puts the largest companies at the top. Second, large companies have the most wherewithal to craft policies and disclose them.

On the flip side, larger companies are under more scrutiny and are likelier to face legal trouble. Also, by virtue of their workforce size and societal footprint, their actions have greater impact. To take one example, JPMorgan Chase’s efforts to close the gender pay gap affects 250,000 workers.

Disney and Mastercard are prominent constituents in both benchmarks. Disney has a diverse board and a strong discrimination policy. Mastercard is one of the top scoring U.S. companies on gender issues according to Equileap.

Plenty of blue chips fail to make the cut. Among the largest of U.S. companies, Apple, Berkshire Hathaway, Facebook, and UnitedHealth are notable for their absences in both indexes. Visa, Cisco, and Boeing qualify for the Minority Empowerment Index but not the Women’s Empowerment Index. Exxon Mobil, Amgen, and Union Pacific make it into the Women’s Empowerment Index but not the Minority Empowerment Index.

Diverse and inclusive companies exhibit other positive attributes

The constituents of the Morningstar Minority Empowerment Index and the Morningstar Women’s Empowerment Index tend to be less volatile and possessed of stronger competitive advantages and healthier balance sheets compared with the overall market. This analysis relies on the Morningstar Global Risk Model, which tracks securities’ exposure to dozens of factors, or sources of return. Both indexes beat their parent—the Morningstar® U.S. Large-Mid Cap Index™—on measures of volatility, economic moat, and financial health.

While performance of the indexes will inevitably vacillate over time, it’s likely that these holdings-based attributes will endure. The results of the Global Risk Model analysis are consistent with other Morningstar research linking sustainable investments to these factors. Companies serious about diversity, inclusion, and other sustainability criteria tend to be strategic in nature, focused more on building a durable long-term franchise than beating next quarter’s earnings.

Please see below for important disclosure. 

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Important disclosure

The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Opinions expressed are as of the date written and are subject to change without notice. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission.

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