Variant Perspectives: Women in Value Investing

Championing female fund managers: #SizeMattersGrowAUFM

Omaha, May 2019. Event Review by Hamlin Lovell.
Originally published in the June | July 2019 issue

“Women are running sub-scale businesses, and this is not due to performance,” said Barbara Ann Bernard, founder of global equity long/short Wincrest Capital, which has outperformed the average long short/equity fund, and generously sponsored the inaugural Variant Perspectives (VP) conference along with Sionna Investment Managers, Rittenhouse Rankings and Robotti Value Investors. Is the industry meritocratic if statistically speaking women raise fewer assets, and have lower longevity and survival prospects, than men with similar performance (as found in academic study, “The Performance of Female Hedge Fund Managers”, by Nicole Boyson and Rajesh Aggarwal, 2015)?

This new event aims to increase the percentage of assets managed by women and by women-owned firms. Just 1% of assets managed by the private sector asset management industry are managed by majority women-owned firms, according to one study. The social media hashtag for VP is #SizeMattersGrowAUFM.

The event was held in Omaha, Nebraska, on Friday 2 May 2019, and was opened by Warren Buffet, who lamented that “the United States has spent more than half of its history not using the talents of half of its population”. When the Berkshire Hathaway AGM (which most VP delegates also attended) took place the following day, it was heartening to see nine-year old neophyte investors – both boys and girls – asking questions. Some of them came all the way from China. Buffet has met with groups of budding young female investors in the “Smart Women Securities” competition for university students. “A stock does not know who owns it, and nobody cared that I came from Nebraska and not New York,” he said.

Entrepreneurs must arguably be “pathological optimists”. What advice can be given to women of this persuasion?

Women and investment performance 

While over 2,000 studies have looked at ESG investment policies and performance – and 63% found a positive correlation, according to a meta study (ESG and financial performance: aggregated evidence from more than 2000 empirical studies, by Friede, Busch and Bassen, 2015) – we know of only a few dozen that have examined another facet of ESG: the diversity of the fund managers themselves. 

Some studies find no meaningful difference between men and women’s investment performance, others suggest that women outperform, and at least one shows more diverse teams outperform. Much research also suggests that smaller hedge funds outperform, which is particularly relevant to women-run funds. 

Hedge fund manager performance is usually assessed over a multi-year period including a range of market cycles, and returns are risk-adjusted. On that basis, the HFRI Women’s Index (comprised of women owned and/or managed funds) has delivered a Sharpe ratio of 0.59 between inception in January 2007 and April 2019, against 0.48 for the HFRI Asset Weighted Composite Index, which is, by definition, dominated by larger funds. The HFRI Diversity Index, which includes US citizens belonging to various ethnic minority groups (broad labels are African Americans, Hispanic Americans, American Indians and Asian Americans) and/or women, did even better with a Sharpe of 0.74 over the same period.

Given the relative dearth of women in investment, it is not surprising that most studies do not calculate the statistical significance of results; the sample sizes and time periods are often not (yet) large enough. And most studies exclude both male and female fund managers who work for non-profit making – public sector and voluntary sector – entities such as pension funds, endowments, foundations, family offices and sovereign wealth funds. These organisations seldom publish performance track records for individual fund managers (an important topic we will revisit). 

Another angle touched on was how gender impacts the performance of companies into which funds may invest. Dan Hanson, manager of the Jana Capital Impact Fund, who ran a sustainable BlackRock strategy for a decade, said “great companies with good inclusive decision-making drive great long-term results. Gender diversity is all part of good culture and decision making”. Indeed, various studies have shown board, management and ownership diversity are correlated with better shareholder returns. 

This nascent field of research has enormous potential to grow and it would be useful to see gender, and other diversity filters added to both re-hash historical, and refine future, performance studies. For now, the available data we have on women investment managers, and company managers/boards, is neutral or positive.

Women’s under-representation in fund management

Women are under-represented in senior management positions in nearly all private sector industries, including investment management roles. Using majority company ownership to measure representation clearly understates women’s involvement: a full picture of women’s ownership of asset management firms would need to aggregate minority as well as majority ownership stakes to arrive at a weighted average ownership figure. Women’s minority ownership stakes in multi-billion asset managers are probably worth a substantial multiple of their majority stakes in generally sub-scale businesses. 

Yet even a fuller picture of ownership is not a useful proxy for the total number of female fund managers, and the topic of women-owned asset managers should not be conflated with the broader issue of female fund managers. Women-owned firms do not necessarily employ any, many, or a majority of other women in investment roles (the largest majority women-owned hedge fund manager that we know of, a systematic manager which manages c.$7 billion, recently had only one woman, the founder, in an investment role). More importantly, many male and female fund managers cannot, by definition, have any ownership, because they work for non-profit entities that have no corporate ownership structure as such. 

Still, a broader range of measures shows women are under-represented in finance: they make up “35% of Registered Investment Advisers (RIAs), 23% of Chartered Financial Planners (CFPs), 19% of Chief Financial Officers (CFOs), 18% of CFA Charterholders, 11% of private equity managers, 9% of mutual fund managers, 8% of venture capital executives, and only 2.5% of hedge fund managers,” according to Meredith Jones. I have not found data to confirm if women are less under-represented in public and voluntary sector fund management, but it is worth noting that some such organisations eg Harvard Endowment or CPPIB employ some women fund managers, such as Dureka Carrasquillo, to run hedge fund strategies in house.

Raising women’s profile 

Yet media coverage of women in finance is more often than not based on anecdote or hearsay rather than hard data, and often grossly understates the number of women investment managers. This perpetuates the problem, by discouraging women from pursuing academic or professional study or job applications that might lead to a career in investment. “You cannot be what you cannot see,” said Amanda Pullinger, the CEO of “100 Women in Finance” (100WIF), which now actually has 15,000 members, some of whom are men, in 23 locations, spread across 4 continents. 

“To combat the anonymity and near invisibility of women in finance, 100WIF has multiple initiatives,” she continued. One is a campaign to raise the visibility of women fund managers, in hedge funds, private equity, real estate, and long only. Three hundred women – and counting – have uploaded headshots and basic information to a growing international public directory. 100WIF also hosts what are in effect capital introduction conferences to match women fund managers with institutional allocators, and alerts women to opportunities for media appearances and quotes, and speaker slots at events. “Community outreach activity includes educating younger women about the social role played by the investment industry, for instance in funding teachers’ pensions. This has been very successful at converting neutral or negative feelings about finance to more positive ones,” Pullinger added.

Nature or nurture

Two schools of thought on why women may outperform are somewhat analogous to the nature versus nurture debate in education. One theory, popularised by Women of The Street: Why Female Money Managers Generate Higher Returns (and How You Can Too) author, Meredith Jones, is nuanced but could be truncated into the idea that women are biochemically and neurologically less susceptible to the biases identified by behavioural finance, partly because the interaction of testosterone and cortisol in men can encourage riskier behaviour. Specifically, women are held to be more predisposed towards long term value investing, and studies show they were less likely to sell in stressed markets such as 2008. A counter-argument is that good discretionary fund managers of any gender should be able to recognise and control these biases; Buffett has held some stocks for 50 years and said that he sees no difference between how men and women invest. And managers of systematic and quantitative strategies generally claim that their unemotional models eliminate and/or profit from behavioural biases.

The nurture theory is in fact that the lack thereof has spurred women on. The argument is that women (at least in private sector asset management) have to rise above a higher bar to become fund managers in the first place, rather like marathon runners who build up more stamina by training at high altitudes. If this is true, then the logical conclusion is that the current cohort of female fund managers are an elite group and are not representative. The average quality of female fund managers might therefore shift as the gender balance is redressed. The corollary is that a greater prevalence of average female fund managers (and company managers, directors etc) would signify that equality has been attained.

Recruitment and education 

Recruitment of investment managers – as in other industries – is seen as being biased towards men. “Affirmative action” or “positive discrimination” has run into legal challenges because discrimination in favour of the underdog is nonetheless discrimination, and has been dubbed “reverse discrimination”. Therefore, one remedy is to ensure that “slates”, (known as “shortlists” in UK English) are diverse, as recommended by the “Rooney Rule”. ESG activist investor, Dianne McKeever of Ides Capital, who is one of only six activist women fund managers we know of globally, all bar one of whom have featured in various editions of our “50 Leading Women in Hedge Funds” report, is campaigning for board diversity. 

Bernard was fortunate in that Sir John Templeton recognised her potential at the age of 15, but some girls opt out of STEM subjects as early as aged 11, according to Meredith Jones, who advocates financial literacy classes in schools. Parts of Asia may be ahead of the US in this area: in China, 52% of those taking the CFA exam in June 2018 were women, against 29% in the US.

Allocators and due diligence

Most allocators “talk the talk” about women investment managers, but few “walk the walk”. Unfortunately, for some manager searches, there may simply not be any women active in the specific strategy, in which case the only way to access a woman investment manager might be to seed a fresh fund. Indeed, the female fund manager problem is partly the emerging manager problem: post-crisis, most capital has flowed to the bigger managers. “Criteria on minimum levels of assets, track records, and maximum levels of concentration in a vehicle inadvertently discriminate against women fund managers,” pointed out Pullinger. 

But some allocators do make more effort to ensure diversity. “We consult to some of the largest endowments, pension funds, and sovereign wealth funds, have a long history of allocating to minority-owned managers and have allocated USD 1.4 billion to funds run by diverse founders. We have a database of c.5,000 funds, of which c.500 have minority or women ownership,” said Managing Director and CIO, Alifia Doriwala, of The Rock Creek Group (whose founder and CEO, Afsaneh Beschloss, featured in the 2011 edition of The Hedge Fund Journal’s “50 Leading Women in Hedge Funds” report). Rock Creek itself is also one of the largest women-owned firms.

Only 26 US states have programs to allocate to managers with diverse owners, and the amounts are small, according to Meredith Jones. Some states distinguish between women and minority owned businesses while others lump them together. Most states have no policy but one is unique in actually precluding the favouring of WMBE [Women and Minority Business Enterprise]: “California passed Prop 209 into law in 1996, which prohibits targeting or giving preference to minority or women-owned businesses,” according to the National Association of State Retirement Administrators (NASRA).

“The obstacle is now on the investor side, they are key,” said KPMG partner, Kelly Rau. “The obstacle is the poor quality of conversations around the issue. We need to have intelligent and compelling conversations,” said Laura Rittenhouse, of Rittenhouse Rankings. There are signs of change however: the Financial Times in May 2019 reported that Willis Towers Watson’s Head of Manager Research, Luba Nikulina said her firm had downgraded one manager and rejected two others due to insufficient commitment to diversity.

Female entrepreneurship in perspective 

Pullinger has worked in seven industries and finds finance no worse than the others for women’s prospects. The small percentage of asset managers owned by women is part of a wider societal disparity: across all industries, only 2.2% of venture capital funding goes to women. Though both retail and institutional investors are allocating more to microfinance, which helps women entrepreneurs in poor countries, fostering female entrepreneurship in rich countries seems almost a lost cause; Melinda Gates’ recent speech on this was a lonely voice. 

According to some estimates, 63% of wealth is controlled by women. This comes mainly from inheritance and divorce, and although a fair number of wealth advisers are women, very few of the assets are directly managed by women fund managers or used to support women entrepreneurs. That women’s wealth is mostly managed by men is not so surprising as managers are usually chosen by advisers and most financial products (eg corporate pensions, 401ks) restrict any choices to the investment strategy or asset class, and not the fund manager’s gender. China leads the world in self-made female billionaires, possibly a benign legacy of the Communists’ gender equality ideal. Other emerging markets may also be more conducive to women’s advancement: Amy Flikerski, Senior Portfolio Manager at CPPIB, who has worked in Brazil, Hong Kong and the US, has identified “11% of private equity firms in emerging markets had at least one woman partner, slightly higher than the 10% seen in developed markets”. “Women are incredible entrepreneurs and they need to network more with other women founders, and venture capitalists,” says The Invested Practice founder, Danielle Town.


“11% of private equity firms in emerging markets had at least one woman partner, slightly higher than the 10% seen in developed markets.” – Amy Flikerski, Senior Portfolio Manager at CPPIB.

Going solo: tips for start-ups

Most new businesses in any industry fail, and investment management is no exception, with the odds apparently stacked against women. A significant handful of women who have launched their own fund give up the ghost after a few years, and sometimes join multi-billion multi-strategy platforms where they can manage more assets – and get paid more – while avoiding the headaches of handling operational and regulatory matters. Entrepreneurs must arguably be “pathological optimists”. What advice can be given to women of this persuasion?

Morgan Stanley Managing Director, Tracy Castle Newman, who founded the Morgan Stanley Women’s Roundtable, can offer putative managers advice on networking, structuring, lawsuits and so on: “we know the good, the bad, and the ugly”. She reckons that, “a niche, differentiated strategy is more likely to succeed than a plain vanilla, FANG dominated, long/short equity approach”.

Seward & Kissel Partner, Debra Franzese’s clients typically set up Cayman offshore and US onshore vehicles. “They need to be aware of EU marketing restrictions. They also need to ensure that they understand the terms of previous employment agreements, such as confidentiality, non-disparagement, non-competes, non-solicits,” she says. “Women should be assertive in seeking to negotiate employment and partnership agreements that provide the contractual right to use personal and portable track records – and which must also heed the SEC rules on track records,” she adds.

Some investors demand side letters, usually offering reduced fees for a founders’ class, but Franzese cautions that, “this could also end up defining terms for future investors who insist on a Most Favoured Nation (MFN) clause”. Ogier’s Joanne Huckle, who works with clients mainly in North America, noted that “investor due diligence processes examining regulations, valuation, and structuring, are getting longer. Fund managers should be prepared for this, and they should also sometimes push back against unreasonably onerous demands for risk reporting”.

EY partner, Michelle Walker, suggests that, “start-ups need to draw up consistent valuation policies, and choose their fund administrator carefully, because different administrators have certain niche areas of expertise”. 

“A solid CFO and COO with start-up experience are needed to take care of service providers, order management, trade management, HR and employees, so that portfolio managers can focus on investment,” suggests Franzese.

A handful of women who have taken the plunge to start asset management businesses shared their war stories. It can take time. Starting in 2002, it has taken Kim Shannon 17 years to build Toronto-based value investor, Sionna Investment Managers, up to c.$5 billion of assets and some 60% of the team are women. Touk Sinantha, co-founder and CIO at AltraVue Capital, Seattle based global small cap value manager, said, “We waited 15 years, to pay off our student loans and build up a track record, before starting our business. We thought our track record would speak for itself but it seems that performance is only one box to be checked by allocators. Structural obstacles to getting an institutional investor include SEC registration, asset minimums and minimum track records”.

Jane Siebels of Green Cay, ran a private hedge fund for Sir John Templeton, and set up one of the first emerging markets long/short funds in 1997, backed by him and seven other families. Siebels has called some key turning points in markets: “In 1999 emerging markets technology were on single digit PE ratios and developed market technology stocks were on triple digit PE ratios. Then in 2002, miners were trading below replacement value despite huge demand from China and India”. But she was frustrated to see men with inferior performance raise more assets.

Dianne McKeever became a partner at small cap activist, Barington Capital, and then set up Ides Capital to focus on long term compounders. She believes that a distinctive approach is needed for small caps. As well as traditional activist analysis of capital allocation and strategic opportunities, she declares “the biggest prognosticator for long term value creation or destruction is governance and board entrenchment issues. This is becoming more important as big ETF allocators are developing in house governance. ESG is incredibly important in driving returns. There are very few women in the activist space, but when we go and meet with boards and management teams who are almost exclusively male, we can combat entrenchment”. 

Asli Ay has spent the past seven years as managing partner of a Washington, DC-based political consultancy, before launching Lioness Capital, a policy and politics-based event-driven fund. “Political risk is not only an emerging markets phenomenon as regulation drives markets in developed countries. Being a woman is an advantage in terms of listening to people better and having a different type of pattern recognition mind. If allocators look at women fund managers, I guarantee that they will find an impressive one,” she concludes.