Women manage only 2% of all assets, and the proportion of female portfolio managers fell to 9% from 10% between 2009 to 2015 — despite the fact that women managers outperform their male counterparts, according to Morningstar. What explains this situation?
A new book dives into this research (while being immensely readable): “Smart(er) Investing: How Academic Insights Propel the Savvy Investor,” by Elisabetta Basilico of Applied Quantitative Analysis and Tommi Johnsen of the University of Denver’s Reiman School of Finance (Palgrave MacMillian).
The book compiles investment ideas tied to recent studies and includes a chapter entitled “Women in Finance: What Does the Research Show?” in which the authors use a myriad of studies to reveal the differences between men and women in finance, where women excel in this field, and how firms can correct issues of imbalance.
One insight the chapter shares is that men are overconfident and trade excessively, while women are more risk averse. Studies have shown that men trade almost 45% more than women, and single men trade 64% more than single women.
Not surprisingly, trading costs for men have averaged 2.65% vs. 1.72% for women. Overconfidence in men can be detrimental to performance, studies have shown, but there is plenty of research suggesting that women are less confident about investment decisions than men, the authors write.
Another insight: Although there aren’t differences between men and female-managed funds in terms of performance and risk, investors prefer male fund managers. This could in turn cause mutual fund families to be “apprehensive about hiring female manager if they fear that investors will prefer male-managed funds.”
It’s safe to say women are underrepresented across the investment spectrum, in terms of portfolio managers as well as equity analysts.
This poor representation in the analysts’ community is odd, the authors say given research of 2 million forecasts issued by 18,292 analysts covering 21,107 stocks. The studies concluded that female equity analysts “have superior skill at forecasting earnings and the market apparently agrees,” according to the authors.
This research also found that women generally made relatively more optimistic forecasts and are less likely to be bearish than their male counterparts. Research on revised outlooks also was favorable for female analysts.
Old Boys Club?
It’s no surprise that connections help job performance — across the board. However, the effect of connections is greater for men than for women.
Knowing people seems to help improve career advancement in a “substitutive” way for men, while it is “complementary” for women. The authors quote from a study that showed, “If men benefit more from connections on both fronts, their advantages can persist and even widen as their careers progress.”
The authors conclude that, in general, gender biases are “self-inflicted wounds made solely by and within the investment industry.” In addition, research has demonstrated that “diverse teams with representative mix of women and men outperform the alternatives,” they write.
So what should the industry do to be more inclusive? The authors list several ideas:
Rebrand the finance industry as “friendly to women.” This should begin with best practices that cultivate careers for women “at the entry point.” Such efforts need to involve a concentrated effort at attracting women just out of school with workshops and internships, and also efforts that include professional and/or trade organizations to help develop these talents.
Provide access to quality sponsorship. Companies need to be involved in formal sponsorship and mentorship programs — and expose junior level candidates to role models in senior positions.
Reverse the gap in the promotion rate for women by reducing bias in reviews. Junior women are 24% less likely to be promoted than compared to male counterparts. This needs to change.
Offer flexibility in the workplace to enhance work-life balance. Surveys have found women may not want to take on senior level positions because of conflicts with work-life balance. This can be dealt with by firms adopting more flexible programs.
Build accountability for advancing gender diversity via target setting and measurement.
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