Here is a story about the marketing of financial products. Sallie Krawcheck is doing some stuff with the women’s network that she bought last year, changing its name from 85 Broads1 to Ellevate,2 and using it to offer “an index fund focused on companies where women make up a significant portion of officers and directors”:
The fund is effectively a joint venture between Ms. Krawcheck and Pax World Management. With a new company she and a partner created, Ellevate Asset Management, Ms. Krawcheck bought a stake in the manager of a fund called the Pax World Global Women’s Equality Fund. Under the deal, the fund is now the Pax Ellevate Global Women’s Index Fund.
Now, notice that name change. From “Pax World” to “Pax Ellevate,” for the joint venture, sure. But also from “Global Women’s Equality Fund” to “Global Women’s Index Fund.” Now an “equality fund” is not a technical term, but an “index fund” is. Actively managed mutual funds pick stocks to invest in, and then invest in them, hoping to beat some benchmark. Index funds just invest in all of the stocks in an index, hoping to match the performance of the index.3
So the Pax Ellevate fund will invest in the Pax Global Women’s Leadership Index, “a custom index calculated by MSCI,” the, um,index calculation company. But, again, notice the name: the PaxGlobal Women’s Leadership Index. How will MSCI determine who’s in this index?
The Women’s Index is a customized market-weighted index consisting of equity securities of issuers organized or operating in countries around the world that demonstrate a commitment to advancing and empowering women through gender diversity on their boards, in management and through other policies and programs, and an understanding of the potential business advantages associated with greater gender diversity, as rated by Pax World Gender Analytics.
Yes okay fine but how will MSCI actually decide on the specific companies that go in the index?
In connection with each annual re-constitution of the Women’s Index, Pax World Management LLC (“PWM”), the majority owner of PEM, provides MSCI with the names of the issuers to be included in the Women’s Index.
Oh I see. So Pax World Gender Analytics4 will subjectively rate companies on their commitment to women, Pax Ellevate Management will then choose a list of the companies that Pax World Gender Analytics rates highly, Pax Ellevate Management will give MSCI that list, MSCI will call that list an index, and Pax Ellevate Management will then invest its index fund in that index.
Now, of course: Fine. There is not a ready-made list of companies that treat women fairly. Somebody should make that list, not only because it has important public interest ramifications but also because those companies are sort of obviously going to be better investments than those that don’t.5
Making that list will necessarily be a subjective process, but Sallie Krawcheck runs a group devoted to advocating for and investing in women, and it makes sense for that group to make the list. And then to go invest in the companies on that list.
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But making a list of companies that you think are good investments, and then buying the stocks on that list, is usualy called “active management,” as distinct from “indexing,” which is just taking someone else’s list of companies and buying all the stocks on that list.
The investment process of the Pax Ellevate Global Women’s Index Fund — make a list of companies that are good for women, and then invest in those companies — sounds a lot like the investment process of the Pax World Global Women’s Equality Fund. Only the name has changed.
Pax is not alone: “Index fund” creep has been going on for a while now, with “smart indexes” and “custom indexes” and “improved indexes” and “fundamental indexes” and other things that are active management but that are called index funds. From an investor’s perspective,6 this fund seems to offer some of the key disadvantages of an actively managed fund: high management fees to pay for all that research,7 and the possibility of, you know, not beating the market.
But it also has some of the key disadvantages of an index fund: The index is market-cap weighted, so Pax Ellevate can’t overweight stocks that it thinks are particularly undervalued,8 and it adjusts only once a year, so Pax Ellevate can’t respond quickly to changing conditions. (In fact, Pax Ellevate is required to publish the list of changes to the index before it can change its investments, so it can easily be front-run.9)
If you were just an investor with the investing thesis that companies that empower and promote women are good investments, the right investing decision would be to just buy the stocks of those companies, weighted by how much they empower women and how good an investment you think they are, without giving away too much about your investment-decision secret sauce. That seems to have been the strategy of the Pax World Gobal Women’s Equality Fund, and it worked okay.10