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An index fund that bets on women

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Want to invest in companies that put more women at the top? A new mutual fund aims to do just that.

Sallie Krawcheck, the owner of a professional women's network and a former high-profile Wall Street executive at Citi, Bank of America and Smith Barney, is partnering with the investment firm Pax World Management to launch an index fund that invests in companies that have high ratios of women in senior management or on the board.

Numerous studies show companies with more diversity at the top tend to perform better over time, such as having higher returns on equity or lower volatility. "And yet, research has just been research," Krawcheck says. "This index fund, by investing in the top 400 companies in the world for women — by percent of women on the board [or] percent of women in senior leadership teams — is a way of expressing that investment case."

The fund announcement comes at the same time Krawcheck is relaunching the professional women's network 85 Broads, which she bought last year from former Goldman Sachs executive Janet Hanson. The organization will now be called Ellevate Network, a reference to its mission to promote women's advancement and leadership. The rebranding comes with a new Web site, a new digital social network for the organization's members, and a new level of membership.

Krawcheck says she came up with the new name while on her couch after a run. "I was trying to think through something that would be indicative of gender, but also had a sense of movement and forward motion to it."

Since Krawcheck's purchase of 85 Broads a year ago, there had been speculation that she would expand her plans to include investments in women-owned businesses. After she talked about a "move from advocacy of women to the smart business of real investment in women" and hired a new president, some thought she might start an investment fund that put capital into women-owned or women-led businesses.

Instead, Krawcheck's partnership with Pax World Management on an index fund gives investors a more accessible way to invest. Index funds typically have lower fees than actively managed mutual funds, in which a manager picks the portfolio's holdings. The initial investment required is also only $1000, putting it within reach of the everyday investor. Pax World President Joe Keefe says the index fund is unique and offers "a pure apples-to-apples comparison to actually measure and capture the investment return associated with gender leadership."

The fund will invest in more than 400 companies that are part of the Pax Global Women’s Leadership Index, a group of global companies that have high levels of female directors and managers compared to the broader market. The gender makeup of the company's leadership ranks will be the primary factor in determining membership in the index, but other factors — like whether or not the company has a female CEO or whether it has signed on to the UN's Women's Empowerment Principles — will also be considered.

One of the top holdings is PepsiCo, which has a female CEO and five women on its 13-member board. Lockheed Martin, where 30 percent of corporate officers (including the CEO) and 33 percent of board members are women, is also a major investment.

By comparison, research shows that women make up about 20 percent of board seats on average among Fortune 500 companies. And women hold just 14.6 percent of executive officer positions, according to the women's research firm Catalyst.

The Web site for the new index fund, called Pax Ellevate, says that 69 percent of its holdings have three or more female directors (only 13 percent of the broader market have that many). It also says women on average represent 24 percent of top management roles at the companies it holds.

The fund's premise stems from research that has shown having more women in leadership positions can lead to better financial performance. For instance, a 2012 Credit Suisse Research Institute report that reviewed 2,360 global companies found that those with women directors outperformed those without female board members on measures such as return on equity, average growth, and price/book value multiples. Other studies have shown that having more women on boards leads to better priced mergers and acquisitions, and that business units with higher gender diversity also have better financial performance. 

But Krawcheck's real "aha moment," she says, occurred when she was in a meeting with former Catalyst CEO Ilene Lang, who was sharing research on how diverse teams even outperform more capable teams. "I was like, 'Stop, what did you say? Say that again?'" Krawcheck recalls. "Probably because I grew up in industries that worshipped intelligence — where anything can be solved by raw intelligence — it almost stopped me dead in my tracks."

Krawcheck says she was also influenced by her own experience as an executive. "I've had the singular distinction of having worked directly for seven financial services CEOs. And as I've thought about the teams I was on, the ones that operated more successfully were those that had greater diversity of thought to them. Maybe they weren't the most efficient, but they were the most effective."

As an advocate for women's advancement, does she worry at all that the fund will underperform, undermining the argument that more diversity is a good thing? To that question, Krawcheck answers like the financial executive she spent her career being. "That's a risk you always take," she says. "It will, at some point. ... There's risk in anything you do that's worthwhile."

Read also:

Sallie Krawcheck on 85 Broads and the trappings of corporate life

More women on boards, cheaper mergers

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