Diverse teams of asset managers score better returns. Karen Shackleton explores what LGPS should do.
A recent recent survey by Citywire on gender diversity in asset management shared some fascinating data and insights, which highlighted the importance of diversity within the asset management industry (it is not just gender diversity that matters, although that was the focus of the Citywire survey). Of the 16,353 active managers surveyed by Citywire, only 11.8% were women. Even worse, when assessing fund management teams, 35.7% were run by an all-male team.
These statistics are a major concern, at a time when diversity is one of the ESG (environmental, social and governance) issues of concern among local government pension funds. The report measured the current rate of progress on diversity among asset management firms and estimated that we are still 127 years away from gender-parity (let’s not even get started with how the statistics might compare on ethnic, sexual, disability or cultural diversity).
Mixed is best
The report reinforced the need for gender diversity in asset management by looking at the risk and return of funds by gender. It found that mixed teams delivered the best risk-adjusted returns over three and five years. Mixed teams tended to take less risk, but this was not at the expense of risk-adjusted return. This was true across the whole universe but also when analysed for individual asset classes.
The report also analysed drawdowns over different years, including the period to May 2020 which included the strong sell-off in markets as the pandemic spread around the world. Mixed teams consistently had the lowest maximum drawdown in every period analysed, when compared with single sex teams.
Diversity in asset management, it seems, equates to better risk-adjusted returns over time. So why don’t LGPS funds make even more of a fuss about it?
An LGPS committee should be engaging positively and regularly with the fund management teams responsible for their pension fund’s investments. Some questions to consider include:
- What is the diversity of the team who presents to the committee? If not diverse, why is that?
- If representatives from different minority groups are present, how genuinely influential are they in the decision-making?
- What are the firm’s gender, ethnic or disability diversity policies and what progress has been made in the past year?
- Does the investment team offer return-to-work positions for women directly into its team?
- Does the firm have targets on diversity? How is it measuring up?
- Does it publish its gender pay gap? If not, why not?
- Does the firm offer a mentoring programme, for example the cross-company mentoring scheme run by City Hive in partnership with #TalkAboutBlack?
- Does the firm offer a sponsor within the firm who champions individuals in minority groups at talent reviews, promotion boards etc?
- Does the investment team offer flexible- and home-working arrangements?
- Do minority groups consider that the senior management team set a positive, supportive culture with a healthy balance between home and work?
Listening
Change happens slowly in any industry, but the City needs to listen carefully on diversity issues, because that is the way it will deliver best value to investors.
One of the most powerful ways to influence an asset manager is for an LGPS fund to express strong, firm, and directive views on the issue of concern.
For example, an LGPS fund who recently demanded that the investment team revert to its board about not publishing their gender pay gap was told at the next meeting that management had listened and were now making this data available.
One LGPS pensions committee makes a point of asking about diversity as part of the ESG discussion every time they meet their investment teams. Several LGPS funds are now holding dedicated committee meetings that focus on ESG and RI (Responsible Investment) where diversity has become deeply embedded into the annual review.
This means the asset managers are left in absolutely no doubt that diversity is an issue of concern and needs to be addressed.
Many LGPS funds start by considering gender diversity alone, but quickly realise that other diversity issues should follow on. Common sense suggests that if gender diversity leads to better risk-adjusted returns, then representation from other minority groups is likely to do the same.
It is diversity in thinking that matters. It avoids group think and allows for challenge and debate in the investment decision-making process—both valuable contributors to delivering strong risk—adjusted returns over time. Diverse thinking is as important as a robust investment process, or low fees, when selecting an asset manager.
Worst?
Encouragingly, the UK asset management industry is not the worst when it comes to gender diversity. Both the UK (11% women in investment teams) and the US (10%) are close to average, whereas Germany has just 6% of active investment managers who are women. On the other hand, many Asian countries are way ahead (Hong Kong 28%, Singapore 20% and Taiwan 19%), so we still have much further to go in the UK.
A light on the horizon is the general trend towards sustainable investing. This is an area that seems to be attracting a greater level of diversity and hopefully the risk-adjusted returns delivered by sustainable asset managers will be superior, in part because of that diverse thinking.
My thought for the day is this: Wouldn’t it be nice to achieve gender parity in asset management in our own lifetime, as opposed to 127 years’ time? As a woman who has worked in the pensions sector for nearly 40 years, that would indeed be an extremely satisfying moment.
Karen Shackleton is founder of Pensions for Purpose and senior adviser for MJ Hudson.
Photo by Christina @ wocintechchat.com on Unsplash
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