- Gender-diverse companies outperform with less volatility
- Results of study by equity research team on 1,600 stocks
Valuations, profit expectations, dividend payouts -- every investor has a favorite reason to buy a stock. Morgan Stanley says to add one more: corporate diversity.
That’s from a study led by the bank’s chief equity strategist, Adam Parker, that examines the returns of companies ranking the highest on a series of qualities that measure gender diversity within corporations. They range from day-care policies to the representation of women among executive positions.
What they found: American and European companies with the most generous policies not only offered slightly higher returns in the stock market, but did so with lower volatility. The highest-ranked North American stocks beat the lowest by 2.3 percent on a monthly annualized basis in the past five years, and when adjusted for volatility, the advantage was greater.
“It’s always been a nice thing to have but this shows it’s not just a ‘nice-to-have,’ it actually makes the investment better,” Parker said in an interview at the bank’s offices in New York. “We now have the empirical evidence that gender diversity is a positive for performance.”
Using a volatility gauge called the information ratio -- a metric designed to suss out returns attributable to catalysts beyond the market’s normal ebb and flow -- Parker’s team found that diverse companies don’t swing as wildly as their peers. The standard deviation of their monthly relative returns was 2.1 percent since 2011, compared with 3.6 percent in the least diverse group.
“It isn’t a little less volatility -- the maximum drawdowns were way more mild among the diverse companies,” Parker said, referring to the distance a stock falls in its biggest swoon over a given period of time. “The volatility is so much lower that you’re capturing something about more balanced, higher-quality organizations.”
The bank’s study adds to a growing body of research that suggests gender diversity in companies is not just sought after by an increasing number of investors, but can also enhance returns.
In September, a study by the Peterson Institute for International Economics and EY showed companies with at least 30 percent of women in leadership roles may boost profit margins by about 15 percent compared to those with no female leaders. At the same time, investing strategies based around socially progressive companies are becoming more common.
“Gender diversity in the workforce, and in leadership roles or on boards, is like a lot of other governance and social factors in business -- done well, it is usually a good sign of good management and leadership,” said Michelle Edkins, global head of corporate governance at BlackRock Inc. “Good management deals with social and other factors well and that achieves sustainable, or steady, returns over time and, hence, lower share-price volatility.”
The study’s findings may be of interest to asset managers who have seen money yanked from funds this year following an equity rout that sent the S&P 500 down 11 percent by mid-February. One of the few areas of the market that has not seen outflows has been exchange-traded funds designed to minimize volatility. Investors have funneled $7 billion to those in 2016.
Shares of the most diverse companies had the fewest instances of falling at least 10 percent in any given month, according to the study. Among the highest-scoring companies over a five-year period, 6.1 percent had a loss of at least 10 percent in any given month, compared with 7.1 percent in poorly-rated shares.
Among 10 companies listed in the report that have consistently ranked the highest for diversity scores in the past 10 years, seven traded with a beta of less than 1 to the S&P 500, according to Bloomberg, meaning their shares swung less in either direction than the benchmark gauge. The group includes Johnson & Johnson, Duke Energy Corp. and CenturyLink Inc.
Morgan Stanley used five criteria in assessing diversity at about 1,600 different companies around the world: the percentage of female employees overall and in so-called “c-suite” executive roles, the size of the pay gap between male and female workers, policies that address diversity issues and the type of programs that enhance life outside work, such as maternity leave.
The data in the study, compiled from Thomson Reuters Corp., isn’t perfect. For one thing, many companies didn’t start recording or reporting demographic data related to diversity until the early 2000s. The volatility analysis was assessed over the last 10 years and excluded extremely small or young companies.
It’s also hard to determine any causality in the trends. Do stocks of diverse companies swing less because they’re more friendly towards women, or do established, more successful companies have progressive policies to begin with?
The trend among the investing community to seek out companies with female leaders and diverse policies is already gaining steam, said Anwiti Bahuguna, senior portfolio manager at Columbia Threadneedle Investments.
“People want to invest in companies where there are women on the board,” she said. “The purest point is it brings in diversity of opinion -- a portfolio run just by females wouldn’t be as good either. There is a focus on balance and risk-taking that happens naturally when you have a combination of diverse opinions.”