Past year performance and revisiting the case for leadership diversity
We launched our Women in Leadership investment theme because we wanted to make a different point on ESG than the classical ways of forming ESG portfolio. The “E” was already covered well across our renewable energy, green transformation, and energy storage themes, so we thought that we could make an interesting angle on the “S/G” and here our view was to highlight companies with the highest share of female executives across the daily executive management team and board of directors.
There is a growing evidence in the literature that gender diversity in the executive body of a company adds to long-term performance, and the Credit Suisse note Higher Returns with Women in Decision-Making Positions from 2016 links to a lot of great information on this observation. Just like we diversify portfolios for better risk-adjusted returns, management teams should also be diversified across gender, age, and other characteristics to ensure decision-making includes different perspectives. While the literature is mixed on men’s overconfidence, due to the scientific question of how can we actually isolate this effect properly, we do have strong evidence of over-confident behaviour among men in trading and investing compared to women. If this trait extends into general decision-making behaviour, we can see why companies dominated by men could lead to sub-optimal decision-making and thus bad long-term performance.
March 8th is International Women’s Day, making it timely that we revisit the case for more female executives. While there is good case to be made in terms of equity returns from companies with a higher share of female executives, we have not seen that over the past year in our investment theme. The Women in Leadership theme has performed in line with the MSCI World Index since the last International Women’s Day on 8 March 2022, declining 1.3% compared to a decline of 1.2% in the MSCI World Index. The five-year performance looks better, but here, as with all our other themes, we have to be aware of the selection bias used in our investment theme selection process. The stocks selected at the inception of each new theme are the ones with the highest market caps. This tends to inflate historical performance, underscoring the conventional wisdom that past performance is not an indicator of future performance.