The performance of the gender equality fund is disappointing

For investors hoping to make good returns by investing in funds focused on companies that emphasize gender equality, it has been a difficult time.

As the FT’s Alphaville recently put it reportedCompanies that scored highly on Morgan Stanley’s Holistic Equality and Representation Index (HERS) last year posted their worst relative performance since 2011.

The performance data must be confusing to anyone who was reading Morgan Stanley less than 18 months ago. investigation who stated that, according to the HERS ranking, gender diversity “continues to pay dividends.”

Morningstar data, which looked only at funds, including exchange-traded funds, that claim to have a bias toward gender equality, suggests the underperformance has been a longer-term story than simply a bad 2023.

So far this year, only about a fifth of gender equality funds have managed to outperform their corresponding Morningstar benchmark, a figure that drops to less than 10 percent over a three-year period and is only marginally higher, at 11 percent, when analyzed over five years.

Fund closings now outnumber launches: this year there were three closings versus one launch, and last year there were six closings versus three launches.

Investors have responded accordingly and net inflows started to turn negative as early as 2022.

For Kenneth Lamont, senior research analyst at Morningstar, investors should think about the data used by funds and ask questions about its suitability as a “sustainable” investment factor, given that data reporting is voluntary, there can be uncertainty about the quality of historical data, and finally, that sector and geographic constraints will greatly affect investment returns.

Lamont identified four broad themes that gender equality funds tend to emphasize: the percentage of women in leadership roles; equal pay and opportunity; women-friendly policies such as flexible working; and transparency (companies could become signatories to the UN Women’s Empowerment Principles, for example, and publish information on gender pay).

It’s easy to see how these perspectives can start to create confusion. A company might commit to increasing the number of women in the organization’s top positions and take consistent steps to ensure its employees have equal pay and opportunities, but it might still score poorly on its current metrics.

Similarly, not all funds try to do the same thing. Some only look at women in leadership positions, hoping to take advantage of evidence that women tend, for example, to make more money. Different financial decisions for men.

However, Diana van Maasdijk, founder and CEO of Equileap, a leading provider of data on gender equality, diversity and inclusion, said that simply looking at metrics for women in leadership positions does not provide a complete enough picture to build an index that delivers outperformance.

“Having a few women at the top doesn’t necessarily mean you’re building better companies,” she said. Equileap, which has just launched the Solactive Equileap Emerging Markets Gender Equality Index to accompany its family of developed indices, also looks at supply chains and policies such as parental leave.

But as Lamont explained, it is difficult to determine which metrics will lead to outperformance. To be sure, many of the funds have not lived up to initial expectations.

He pointed to the example of the larger Global gender ETF, the $779 million Europe-based UBS ETF (IE) Global Gender Equality UCITS ETF (GENDER), which was launched in 2017.

At the time, a UBS strategist saying“Our research indicates that gender-diverse companies tend to outperform across a number of profitability measures” and have “the potential to achieve strong returns.” The fund has lagged the MSCI World Index by a total of 16 percentage points since its inception, Lamont said.

“If gender strategies have a place, it is to reward companies with positive gender metrics, but investors must understand that this can come at a cost,” she added.

Some in the industry have openly speculated about whether the declining interest in gender lens investing is a symptom of a “War on progressives“.

However, Cinthia Murphy, investment strategist at VettaFi, said she saw no evidence of any negative reaction.

He noted that only a handful of companies had driven U.S. stock returns in recent months, most of them linked to technology and the artificial intelligence craze.

“In this environment, differences across stocks and sectors make a big difference in outcomes, which says little, if anything, about views on gender equity and a lot about how narrow market leadership has been.”

According to her, individual gender funds have performed well because they have had similar exposure to indices that have also performed well.

Murphy highlighted the SPDR MSCI USA Gender Diversity ETF (SHE), which has generated returns of 26.2 percent over the past year, compared with 26 percent for the SPDR S&P 500 ETF Trust (SPY).

“Last year it outperformed the S&P 500 and is on par with the index year to date. If you look at the portfolio composition, SHE has the same sector weighting as the S&P 500,” he said.

One problem, as with many funds that promise to outperform the broader market, is fees. SHE, for example, has a total expense ratio of 0.2 percent, versus SPY’s 0.09 percent.

Lamont said that while collecting environmental, social and governance data could help drive positive change, from a cost-effectiveness standpoint, she asked: “Why not just invest in a low-cost index fund and use the difference to donate to women’s charities?”