I’m generally skeptical about investment schemes that say they’ll beat the market, because if picking winning stocks was so easy, then everyone would be doing it. And, if everyone’s doing it, then it’s impossible to beat the market.
That’s the basic idea behind the rational expectations school of thought, which basically says that you’ll never see a $100 bill lying on the sidewalk because someone else would have picked it up before you got there. In investment terms, it says that investors can’t systematically beat the market in the short-term because stock prices essentially follow an unpredictable, random walk (perhaps with a trend).
There are, of course, exceptions to the rule. For years, Peter Lynch beat the market with his Fidelity Magellan Fund, and his ability to regularly outperform other investment managers made him a superstar in the investment world.
Likewise, Warren Buffett, the billionaire head of Berkshire Hathaway, seems able to find valuable investment opportunities that others can’t. He spends a lot of time thinking about where the good investments are and, on the whole, has done a pretty good job of it. A $10,000 investment in Berkshire Hathaway in 1965 would have grown to nearly $30 million by 2005. Not bad.
Despite these examples, however, I’m still skeptical of strategies that promise increased returns without taking on additional risk.
Senior vice president and investment strategist with U.S. Trust Jackie VanderBrug disagrees. She thinks she’s found a winning investment strategy.
It’s called “gender lens” investing.
Investors who put on their “gender lenses” will see investment opportunities that others don’t. By investing in companies that support gender equality, such as by having women in the executive suite and on their boards of directors, they’ll see greater returns than if they had ignored these gender issues. For example, boards with three or more women on them have a 53 percent higher return on equity than companies with no women on the board, VanderBrug noted.
Why does putting women in leadership positions improve a company’s financial performance?
“Women are likely to look closely at how a company does business and spot the kinds of things that companies that are less diversified are likely to miss,” VanderBrug explained in an interview at The Washington Post on Tuesday.
She also explained that following a “gender lens” investment strategy can reach goals regarding gender parity and social causes without giving up financial returns.
“Women like to invest in socially-responsible areas,” VanderBrug told me, adding that a proprietary U.S. Trust product that followed this strategy outperformed a benchmark index by 360 basis points last year.
As explained in greater detail in a U.S. Trust newsletter, this strategy looks not only at how many women are in senior management, but also at whether the firm is pursuing gender wage equity and family leave policies, and whether the lowest-paid workers receive basic economic security. It also looks at whether the company promotes human rights in its supply chain and whether its operations conform to international labor standards by, for example, not employing under-age girls in its factories.
“By taking these considerations into account,” VanderBrug assured me, “investors can promote gender equality and social justice without giving up market returns.”
In other words, a strategy that’s good for the workers and their rights can be good for the portfolio.
VanderBrug also noted that companies that promote women and create diversity on their boards of directors “will outperform a non-diverse board because it will look at a broader range of opportunities.”
In praising the benefits of diversity, she has some good company. Nobel Prize-winning economist Gary Becker, who died on May 3 at age 83, wrote more than 50 years ago that companies that don’t hire the best talent available because of deep-seated discrimination are hurting themselves just as much as they’re hurting the person they’re discriminating against. Becker referred to discrimination against blacks, but the same argument holds for women and for any group that faces unfair discrimination.
So, if discrimination hurts, then eliminating discrimination should help. Smart companies will hire women and reap positive financial rewards.
That seems clear. Being exposed to a broad range of opinions, say by looking through a gender lens, may improve financial performance.
Whether it will can only be judged by future returns. This strategy is still new.
As mentioned above, no investment strategy can produce guaranteed investment returns all the time. Like all the rest, the “gender lens” strategy will have its good times, and it will have its hard times.
Even an investment in Warren Buffett’s company won’t beat the market all the time — shares of Berkshire Hathaway have risen about 4.3 percent a year in the 21st century. Those are decent returns, but not better than the 5.5 percent annual gain a much less risky investment in a fund that tracked the diversified S&P 500 index returned over that same period. Likewise, while hedge fund manager John A. Paulson generated a 63 percent return on his Paulson Recovery Fund last year, his Advantage Plus fund tumbled by more than 50 percent in 2011. Investors who had invested passively in the S&P 5oo index would have gained more than 32 percent in 2013 and lost less than 1 percent in 2011.
The point of this analysis is that if you bet right, you can win big. But, bet wrong, and you can lose a bundle.
So, follow a “gender lens” investment strategy if it makes you feel good.
Just don’t count on making a killing in the market if you do.