Investor love to chase relative performance. That is why phenomena like the ‘behavior gap‘ exist. Therefore prospective statements about manager alpha are a dangerous thing. The long history of finance demonstrates that alpha is promised to no one. That is why we should take statements like the following with a big grain of salt. From Dealbook:
“There is meaningful alpha to be gained from investing in women-owned and -managed funds,” Meredith Jones, a director at Rothstein Kass who wrote the report, said in an interview. “There appear to be both behavioral and biological factors that impact women’s ability to manage money and make them consistent.”
The problem is trying to make definitive statements about relative performance is limited data. Any apparent advantage to female-managed funds may very well be a function of small sample sizes. This is a common issue in financial economics. We simply don’t have enough data to say anything definitive about female-managed funds and their past (or future) outperformance.
The second is that there are real and meaningful differences in the way that men and women approach financial decision making and investments. The research indicates that, not surprisingly, male investors are more quick to trade and female investors are more deliberate in their decision making. Given that the majority of investor mistakes are due to impulsiveness then a more deliberate approach to investing may may make a positive difference to returns.
By all accounts, women in finance are underrepresented. We will leave it to others to decide whether this due to implicit bias, explicit bias or simply a ‘market failure.’ The upshot is that more diversity has the possibility of leading to better decision making. As Sallie Krawchek said in a recent interview:
I’m a research analyst by training, and I refer to myself as a recovering research analyst. And every bit of research I see talks to the not-fully realized economic power of women, both as a purchasing force in our economy as well as a positive impact they bring to businesses when businesses have more diverse management and leadership teams in place.
One of the great challenges in investing is group-think. Investment teams have a tendency to engage in self-censorship and confirmation bias. In pursuit of consensus teams end up forgoing contradictory information and opinions in pursuit of a clear path forward. Diversity of opinion, temperament and thought can if properly managed can help make for more robust decision making.
In our book, Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere, I touched on the research surrounding gender and investing. The entire excerpt can be found in a guest post over at FT Alphaville. The bottom line is that we could all do with more robust mental toolkit when it comes to investing.
It is easy to get locked in to thinking about investments in a certain way. The important takeaway is that all investors, male and female, need to challenge themselves.
Just as men are more prone to overconfidence, women are more likely to “consider every angle” in regard to an investment, which could very well lead to analysis paralysis. We are all flawed and filled with a range of biases. The challenge for men and women is to acknowledge these biases and try our best to combat them.
That being said, men probably have the most to gain from this sort of exercise.
Would the investing world be better off with more female-led funds? In all likelihood. But is that really the right question?
Generating alpha is a tough game for everyone. Therefore investing with a manger based solely on their gender involves a willful shortcut in decision making. I have written previously about the benefit of investment checklists. Perhaps your manager checklist should include an item about team diversity (in the broadest sense of the word). At least that sort of approach takes into account the persistent challenges that investment teams face every day.
Items mentioned above:
Woods, Miller and the broken promise of alpha. (Abnormal Returns)
Want better hedge fund returns? Try one led by a woman. (Dealbook)
Women in alternative investments: A marathon, not a sprint. (Rothstein Kass)
Krawchek: Financial advice needs a makeover. (IndexUniverse)
Investment checklist catch fire. (Abnormal Returns)