Click below to watch the video!
For International Women’s Day this year I thought I’d create a modern day nursery rhyme to remind women everywhere that they have financial power and acumen that they may not even realize. You are so money, ladies!
Hey all! So this happened. Congress had a hearing on diversity in asset management and I was asked to testify. Please see my written testimony below or check out the actual hearing at THIS LINK.
Written Testimony before the
U.S. House of Representatives, Committee on Financial Services Subcommittee on Diversity and Inclusion
Hearing: “Diverse Asset Managers: Challenges, Solutions and Opportunities for Inclusion”
Meredith A. Jones
Investment researcher and author of “Women of The Street: Why Female Money Managers Generate Higher Returns (And How You Can Too)”
June 25, 2019
Chairwoman Beatty, Ranking Member Wagner and distinguished Members of the Subcommittee, it is an honor to appear before you today at this important hearing on how to achieve greater diversity in the asset and investment management industry.
By way of background, I am a 21-year veteran of the investment management industry. I began my investing career in 1998 at a small hedge fund firm in Nashville, TN when I was hired by a male CEO and financial services gender contrarian who believed that women made better financial analysts than men. While I worked my way up from my entry-level position as a hedge fund analyst to become the head of research and a member of the firm’s investment committee, I never doubted my boss’s hiring wisdom (although, always a fan of diverse opinions, I did eventually integrate the department to include men during my tenure).
Employed roughly 1,000 miles from Wall Street, I did not initially realize that other asset management and investment firms had far less gender diversity than mine. In fact, it wasn’t until I started regularly speaking at investment industry conferences (where I was often one of few, if not the only, female speaker) that I began to recognize how little gender and racial diversity existed in my chosen profession. I began to research diversity in asset and investment management in 2010 and, over the past nine years, have come to appreciate just how unique my investment “upbringing” was, as well as how unlikely it would have been for me to be sitting here today without my original boss’s unorthodox hiring preferences. However, even with that leg up, admittedly it has been a rather solitary career path, with few diverse role models, mentors, and sponsors along the way.
As challenging as the lack of diversity may have made my personal journey, that pales in the face of the systemic cost of homogeneity in asset management. In fact, nine years of research has left me with the unshakable knowledge that the lack of women and minorities in the asset management and investment industries is making everyone, from Wall Street to Main Street, poorer.
While this may be a bold statement, I believe a number of factors support the assertion that, as a society, we are missing out on a “diversity dividend.”
1) A wealth of investment research suggests that diverse asset managers may provide similar or even higher returns. Studies from the NAIC[1], CityWire[2], BarCap[3], Babalos[4], Morningstar[5], Rothstein Kass[6] and others show that diverse fund manager performance (either within separate funds or in mixed gender teams) is at least equal to and, in many instances, greater than that of the total investment fund universe. A 2016 study by Oleg Chuprinin and Denis Sosyura found that hedge funds run by individuals that grew up poor (bottom 20 percent of households in terms of wealth) outperformed those managed by managers from the top 20 percent by over 1 percent per year[7]. A 2019 study from Harvard University’s Bella Research Group further found that women and minority owned hedge funds, mutual funds and private equity firms had disproportionate representation in top quartile performance figures[8]. Another Harvard study found[9] that the chance of a venture capital-backed company filing for an Initial Public Offering increased by 20 percent if the backing investors were from different ethnic backgrounds, while venture capital firms that “increased their proportion of female partner hires by 10% saw, on average, a 1.5% spike in overall fund returns each year and had 9.7% more profitable exits,” again per a Harvard Business Review study[10].
These studies and others like them strongly suggest that investors, from the wealthiest of individuals to the police, firemen and teachers that depend on well-invested pension portfolios, may in fact have inadequate financial resources due to lack of access to diverse investment talent.
2) Access to diverse asset management talent may provide another diversification tool within portfolios, and may also help mitigate volatile market behavior, which is currently dominated by a single cognitive and behavioral pattern. At least one study has found that having more women on Wall Street could reduce market volatility[11] due to the introduction of differentiated investing behavior. Another review by investing platform Stash found men 87% more likely to sell[12] during periods of market volatility, which means diversity potentially provides both stability and liquidity in the markets. Furthermore, Hedge Fund Research’s Diversity Index (HFRI Diversity Index[13]) has posted a flat return (0.00%) over the last 12 months, which compares favorably to the HFRI Fund Weighted Index -1.24% loss in value over the same period, further evidence of return diversification.
In addition, according to the National Association of Investment Companies (“NAIC”), one reason for outperformance of diverse private equity managers may be differentiated deal flow. The report concludes[14] that “[m]any diverse fund managers have educational and work experience similar to investors in non-diverse funds. However, some also report having expanded, differentiated networks that allow for deal flow off the beaten path.To the extent that a fund manager has access to such deal flow and can strike deals with less competition, their returns, and investors, may benefit. For example, firms and funds focused on the EDM may have access to companies on the cusp of growth due to changing demographics and shifts in the global economy.”
Despite clear advantages to cognitive and behavioral diversification, some estimates indicate that as many as 95% of those taking risk with capital on Wall Street and in the asset management industry are white males, and we certainly know from a variety of sources that asset and investment management generally lacks diverse participants in any meaningful way. For example, per the Bella Research Group study[15] referenced above, “the number of substantially or majority diverse-owned funds represented just 8.6 percent of the total in 2017” and women-owned firms managed a mere 0.8% of all assets under management while minority-owned firms controlled 1.2% of fund assets. Leaving fund ownership aside, a 2017 review of the alternative investment industry by Preqin[16] found that women comprised less than 21% of all employees in private equity, venture capital, hedge funds, real estate, infrastructure, natural resources and private debt funds, and that, of these employees, only 11% (or less depending on the asset management segment measured) occupied senior roles. And TechCrunch reported that 81%[17] of venture capital firms don’t have a single black investor.
3) Concentration of venture capital investments into similar companies perpetuates unmet consumer needs and lack of investment and jobs into diverse and underserved communities.It has been repeatedly shown that the East and West Coasts dominate the venture capital landscape, with the Bay Area and the New York-Washington-Boston corridor landing an astonishing two-thirds of all venture capital investment[18]. This creates a vast, unexplored economic desert throughout much of the continental United States. In addition, female founders received just 2.2%[19] of all venture capital in 2017 and 2018, while from 2007 to 2012 black and Hispanic founders each received about 1%[20] each in venture capital investments. These statistics are both stark and critical for understanding lost economic opportunities.
Women influence 83% of consumer spending and $7 trillion of spending[21] in the U.S. annually, and consumer spending drives an ever-increasing percentage of the GDP,and yet women’s needs currently may not be met by venture-funded companies. A study by Neilson found[22] that “African American income growth rates outstrippednon-Hispanic whites at every annual household income level above $60,000and the largest increase for African American households occurred in the number of households earning over $200,000, with an increase of 138%.” Yet, their consumer needs may not be represented by current venture-capital funded companies. And “between 2016 and 2017, Hispanics increased their real median income by 3.7 percent[23], the highest of any demographic.”
The lack of funding outside of traditional money centers as well as the near exclusion of diverse founders represents a tremendous lost opportunity for investment, economic expansion and job creation in diverse and underserved communities. Additionally, this compounds the lost opportunities for higher investment return generation, where less competition for portfolio companies creates more reasonable valuations for investors.
In my opinion, these three factors lead to one powerful conclusion: Diversity pays a dividend in asset management, one that, at least with the status quo, we have no hope of collecting.
To address the continuing lack of diversity in asset and investment management, I believe we need to focus on educating three primary groups:
1) Investors– With pension liabilities funded at only 73.7%[24] and with an astonishing 78% of Americans extremely or somewhat concerned about being able to comfortably retire[25], it is critical that the return enhancement and diversification benefits available through investment with diverse asset managers be highlighted and pursued. After all, demand from investors almost always drives innovation and change on Wall Street.
2) Asset and Investment Management Firms– While investors stand to reap the benefits of higher returns, asset managers and investment firms will profit as well through higher income from fee generation. In addition, firms that maximize diversity for returns and diversification may be able to capture a higher percentage of investable assets as investors seek higher return products. Companies that understand how the “diversity dividend” can directly impact their bottom line are more apt to support educational efforts in pre-hire cohorts, recruit diverse talent, uncover and mitigate unconscious bias in hiring and promotion decisions, and provide mentoring, sponsorship and affinity groups as part of a robust inclusion effort. Finally, given the generational wealth transfer taking place to diverse individuals (and the gains in diverse economic status cited above), failure to serve these demographic groups as a client base will almost certainly take a toll on asset and investment manager profitability in the future, further prioritizing this issue.
3) Diverse individuals– Providing financial and investment literacy education to girls and people of color at a young age (high school or earlier) is critical to building a pipeline of qualified diverse asset management candidates. For example, studies have shown that girls opt out of math-related subjects as early as age 11 or 12[26], meaning that it is not sufficient to intervene at the college or graduate school level, when qualified candidates have already self-selected into other academic areas. As a board member for a non-profit that provides financial education to girls (with 69% minority representation), I can say that Rock the Street Wall Street sees a 97% increase in understanding of financial concepts and, perhaps most importantly, 67% of the girls indicate they are now extremely or very likely[27] to explore a major or minor in finance and economics. This type of early intervention is therefore beneficial in building a pipeline of talent for companies and investors, and of course benefits diverse asset management talent as well.
In conclusion, I certainly recognize that diversity in asset management is a complex and costly issue. It is one that has no single, simple solution as it ultimately springs from historical and ongoing conscious and unconscious bias, as well as access to opportunity, education and capital. I do believe, however, that through robust public-private educational partnerships, common-sense transparency requirements (to both measure progress and so investors can adequately assess the level of alpha-generating diversity at asset management firms) and suitable anti-discrimination and harassment statutes, we can change the face of asset management for the future, and enhance the economic well-being of both Wall Street and Main Street in the process.
[1]http://naicpe.com/wp-content/uploads/2017/10/2017-performance-report.pdf
[2]https://citywireselector.com/news/alpha-female-2018-mixed-gender-teams-produce-better-returns/a1145784
[3]https://www.managedfunds.org/industry-resources/industry-research/affirmative-investing-women-and-minority-owned-hedge-funds-a-barclays-capital-report/
[4]https://www.sciencedirect.com/science/article/pii/S0275531915000264
[5]https://www.fa-mag.com/news/morningstar--the-gender-lens-doesn-t-magnify-your-bottom-line-37579.html
[6]https://www.managedfunds.org/industry-resources/industry-research/women-alternative-investments-marathon-sprint-rothstein-kass/
[7]http://webuser.bus.umich.edu/dsosyura/Research%20Papers/FamilyDescentDec2016.pdf
[8]https://kf-site-production.s3.amazonaws.com/media_elements/files/000/000/281/original/2019_KF_DIVERSITY_REPORT-FINAL.pdf
[9]https://hbswk.hbs.edu/item/in-venture-capital-birds-of-a-feather-lose-money-together
[10]https://hbr.org/2018/07/the-other-diversity-dividend
[11]https://www.aeaweb.org/articles?id=10.1257/aer.20130683
[12]https://qz.com/work/1386775/study-of-investors-shows-differences-between-men-and-women/
[13]https://www.hedgefundresearch.com/family-indices/hfri
[14]http://naicpe.com/wp-content/uploads/2017/10/2017-performance-report.pdf
[15]https://www.institutionalinvestor.com/article/b1cwvq3mc37xwk/Asset-Managers-Owned-by-Women-and-Minorities-Have-to-Work-10X-as-Hard-for-Assets
[16]https://docs.preqin.com/reports/Preqin-Special-Report-Women-in-Alternative-Assets-October-2017.pdf
[17]https://techcrunch.com/2018/11/08/81-of-vc-firms-dont-have-a-single-black-investor-blck-vc-plans-on-changing-that/
[18]https://www.citylab.com/life/2017/10/venture-capital-concentration/539775/
[19]http://fortune.com/2019/01/28/funding-female-founders-2018/
[20]https://money.cnn.com/2016/04/12/smallbusiness/latino-venture-capital/index.html
[21]http://www.genderleadershipgroup.com/the-inclusionary-leadership-blog/210
[22]https://www.nielsen.com/us/en/insights/reports/2015/increasingly-affluent-educated-and-diverse--african-american-consumers.html
[23]http://hispanicwealthproject.org/resources/blog/new-hispanic-wealth-project-report-confirms-critical-role-of-hispanics-in-u-s-economic-growth/
[24]https://www.bloomberg.com/graphics/2018-state-pension-funding-ratios/
[25]https://news.northwesternmutual.com/2018-05-08-1-In-3-Americans-Have-Less-Than-5-000-In-Retirement-Savings
[26]https://techcrunch.com/2016/01/05/why-stems-future-rests-in-the-hands-of-12-year-old-girls/
[27]https://rockthestreetwallstreet.com
(c) 2019 MJ Alts
I have to say, Facebook is getting disturbingly good at targeting ads. Lately my timeline has been populated by comfort items – cozy PJs, custom pillows that ‘guarantee’ a good night’s sleep, shoes without three-inch heels and even this random beanbag thing called a MoonPod. Evidently you buy one too many cards that reads “People, Amirite?” and the magic algorithms of Zuckerberg’s evil empire decide you need a little time out.
In this case, however, they happen to be right. I am tired. Exhausted. Plum tuckered, to use the language of my youth. Lately, I DO actually find myself in need of a mysterious bean bag chair that simulates weightlessness and helps to reduce anxiety and depression. And why I find myself in this state (and why I actually bought that effing MoonPod) is no real mystery. It’s people. Specifically, it is people in the investing industry.
You see, over the past several weeks, a couple of articles have been published that purport to explain why diversity does (or doesn’t) matter in the investing world. The first (in Barron’s) included comments from Jane Buchan that were based on a 2016 study by Rajesh Aggarwal and Nicole Boyson which found “funds with all female managers perform no differently than all male‐managed funds and have similar risk profiles” The second, which was cited in multiple outlets, including in the Financial Times with the incendiary title “Harvard Study Questions Benefits of Fund Manager Diversity,” was penned by Josh Lerner of, you guessed it, Harvard.
As someone who is active in the emerging and diverse fund manager universe, let’s just say the appearance of these articles means I’ve gotten A LOT of emails and DMs on the topic over the past few weeks. I’ve received enough, in fact, to turn my thoughts from acquisition of the Iron Throne to procurement of a freakin’ anti-gravity bean bag.
First, let’s set aside any issues I may have with the way various diverse manager studies are conducted. No study is perfect, including the ones I’ve done myself. However, there are some specific items that really butter my toast:
Single source data – Particularly in the alternative space, using a single data source is almost a guarantee for a small sample. Looking at the total manager counts in some studies is almost enough to make me buy a pair of comfortable shoes, especially since in a number of cases I can list more diverse funds off the top of my head than were included in the total sample.
Mixing social justice and behavioral finance – I get why studies use women- and minority-owned firms as a data set in performance papers, I just don’t happen to agree with it. One metric attempts to measure social justice (the existence or lack thereof of a level-playing field in fund management), while the other aims to quantify behavioral finance – how different subsets of people prosecute investing opportunities and whether these approaches are more or less successful. IMHO, in order to have a true picture of performance, you need to look at the full sample - all diverse fund managers regardless of their stake in the firm’s bottom line. You can still measure the existence of diverse fund ownership, just don’t conflate the two issues.
Focusing on fund performance – In the long-only space, for example, you may find a number of diverse investment managers who don’t have a mutual fund or CIT or other vehicle due to the costs involved and need for a seed investor. But isn’t their performance meaningful as well? Same goes in PE, where a number of diverse private equity investors work (at least initially) more in co-investing than in traditional comingled funds for the same reason. I know it makes it tougher to collect data, but ultimately the data would be more robust.
Looking only at averages – Many studies have found, including Lerner’s recent study, that even if averages are equal, that there may be a disproportionate percentage of diverse funds in the top performance quartiles. Seems like this is an important point, too.
But, leaving all that aside, what makes me most want to retreat to the MoonPod are the emails I get that say, “Huh, I guess diverse fund management ISN’T a thing.”
It’s funny (and I don’t mean HaHa) that I tend to get two responses to these studies when they come out. If a study shows outperformance for diverse fund managers, the default response is “Jackie Robinson.” I can’t tell you the number of times that someone says to me “Don’t you think that the real reason diverse managers outperform is because the fund management industry is so unwelcoming to women and minorities that only the best and brightest diverse managers survive, which is why they ultimately outperform?”
If, on the other hand, a study like Lerner’s or Aggarwal’s shows that performance of diverse fund managers is roughly equal to that of white male investment counterparts, I get the “Ginger Rogers” defense. “You know, if there isn’t outperformance in the diverse manager landscape…if the diverse fund manager can’t do all the same moves backwards and in heels…what’s the point?”
Robinson on the left of me. Rogers on the right. Here I am, stuck in the middle with you.
So it’s either the studies are skewed towards high performers, with the accompanying implication that when more, potentially less skilled, diverse fund managers enter the fray that said outperformance will be as ephemeral as my desire to wear flats. Or the studies show no significant outperformance, meaning that there is no reason to take a “risk” on someone whose personal appearance, background or fund management organization may look different.
But y’all. We are in the investing industry. We take risks every day. We are supposed to look at the available data and make a calculated calculation about whether or not a particular investment is “worth it.” But somehow we continue to miss the forest for the trees on this particular topic.
The lion’s share of the studies (NAIC, CityWire, Lerner, Aggarwal, BarCap, Babalos, Morningstar ,Rothstein Kass to name a few) that are available show that diverse fund manager performance (either within separate funds or in mixed gender teams) is equal to or greater than the total investment fund universe, effectively taking performance OFF the freakin’ table as a risk factor.
So, if performance isn’t a negative factor and, in fact, may potentially be a positive, what risks remain?
Mainly ones we are creating ourselves.
You see, in Aggarwal’s research, he found that funds with at least one female fund manager fail at a higher rate than all-male fund complexes. He notes that “management and incentive fees are much higher for all-male funds than all-female funds” and I can anecdotally say the same is true for minority-run funds. And both groups are almost always more willing to negotiate fees, too. When you combine this with the ample research that diverse funds tend to have fewer assets under management (AUM) than non-diverse funds (BarCap, Lerner, Aggarwal et al), and it is little wonder why these diverse managers don’t have the same robust operational infrastructure of their non-diverse, large fund brethren? A – they don’t need it at their size and B – they can’t afford it as they slash fees in an attempt to grow AUM.
Indeed, it seems like the market is looking for a perfect, shiny, definitive study that proves, beyond the shadow of a doubt, that diverse fund managers (along with two of my other fund management loves, emerging managers and ESG investing) consistently beat non-diverse funds in order to justify the “risk” of investing with them. A “risk” that would be mitigated if only more people were investing with them.
Calgon, take me away!
At the end of the day, I just don’t see studies saying diversity is a bad thing. I see studies saying it can be difficult to manage diversity. I see studies saying it can be uncomfortable for the team involved when differing opinions and viewpoints are brought into play. I see studies saying building diverse teams (or portfolios) can be tough. But diversity of thought and behavior is, I think, worth the impediments and small risks we take to get it.
I’d be willing to bet my MoonPod on it, y’all.
In January of this year, I was asked to speak at the 2018 TEDx UIUC event "Roots." The theme of the event was pretty straightforward - "The beginning of all things are small" (Cicero). The organizers asked me to talk about both my professional journey and the work I do around diversity in finance/investing.
First, I was very flattered.
Then, I *may* have pooped my pants a little at the thought of giving a TEDx talk.
Ultimately, I of course accepted. And on April 22, 2018 I gave my talk to about 400 students, faculty, members of the Champaign-Urbana community, my mom, and Jill Kimmel (yes, THAT Kimmel).
If you've got just under 20 minutes, I hope you'll take time to watch it. If you like the message, I hope you'll take time to share it. If you utterly hate it, let me know and I'll send you a personal note of apology for the time wasted AND I'll try to prevent my mom from sending you hate mail, too.
I seem to provide this information to newer and smaller funds often, so I thought I'd cut down on repetition and provide all you gorgeous small, new, and diverse fund managers with a short guide to early stage investors. Now start smiling and dialing!
(c) 1980 Paramount Pictures
Arizona - Has made at least one investment in a large 'emerging' manager.
Arkansas - Teachers Retirement System reportedly tabled the program in 2008 but 2011 document shows active investments in MWBE managers.
California - Looks for EM's based on size and tenure but prohibited by Prop 209 from looking at minority status or gender.
Colorado - Colorado PERA added an "external manager portal" in 2016 to make "it easier for us to include appropriate emerging managers when the right investment opportunities develop."
Connecticut - Based on size, minority status or gender. Awarded mandate in 2014 to Grosvenor, Morgan Stanley and Appomattox.
Florida - Looks at emerging managers on equal footing with other managers.
Georgia - Invest Georgia has $100 million to work with venture capital and private equity firms in the state. There is an emphasis on emerging managers and emerging funds per press reports.
Illinois - Perhaps the most active emerging manager state, based on gender, minority status and location.
Indiana - Based on size, minority status, or gender.
Kentucky - Reported $75 million allocation at one time.
Maine - Has made at least one investment in a large 'emerging' manager.
Maryland - Very active jurisdiction with details available online for gender and minority status manager information.
Massachusetts- Includes size, minority status or gender.
Michigan - $300 million program.
Missouri - Status based on size.
Minnesota - Past investments in emerging managers.
New Jersey - Status based on size.
New York - Status based on size, minority status or gender. $1 billion mandate in 2014. $200 million seed mandate in 2014.
North Carolina - Status based on size and HUB (minority and women owned) status.
Ohio - Status based on size, minority status or gender.
Oregon - Emerging manager program in place.
Pennsylvania - Status based on size with preference for minority or women run funds.
Rhode Island - Plan in place from 1995.
South Carolina - Status based on size.
Texas - Actively engaged with emerging managers. Status based on size, minority status or gender.
Virginia - Status based on size, minority status or gender.
Washington - Has issued prior emerging manager RFPs.
Oh, and if you reproduce this list, be sure to cite MJ Alts. Thanks y'all!
https://www.hfalert.com/documents/FG/hsp/hfa-rankings/575025_Backers.pdf
(c) 1988 Bull Durham
Anyone who has spent any time talking to me or reading my blogs knows I love a good movie. Although I don’t see as many as I’d like these days, I love how a film can transport you, inspire you, create emotion and just generally entertain. I even use the love of a particular film as a kind of odd litmus test in friendship, business and dating situations. Did you adore Forrest Gump? Yeah, that makes me seriously question your judgment.
But some movies stand out more than others in the MJ Pantheon of Favorite Flicks. Star Wars (the original trilogy, natch), Shawshank Redemption, Argo, Bridesmaids, The Blind Side (don’t judge me), The Wolf of Wall Street, The Princess Bride, 50/50, Raiders of the Lost Ark, Rudy, Love Actually, Aliens, The Terminator (1 & 2), Die Hard and Pride & Prejudice (the 2005 version) are just a few of my all-time faves.
And of course, there’s Bull Durham. Though I’m not a huge fan of baseball (too slow, lots of spitting, often hot), I loved that movie when I first saw it at the ripe old age of 18. It was my first sophisticated on-screen romance, which had theretofore been populated by teen sex films (e.g. Porky’s), John Hughes offerings (Pretty in Pink, Sixteen Candles) and saccharine Disney scripts.
When Kevin Costner’s Crash Davis gave his epic speech during Annie Savoy’s, ahem “tryout” between Crash and Nuke LaLoosh (Tim Robbins), Susan Sarandon wasn’t the only one who sighed “Oh my…”
In case you haven’t seen Bull Durham since it’s original 1988 release (sacrilege!), here’s the scene in question. (And you may not remember this, but it is officially NSFW.)
Since we’re nearing the end of summer, I decided to watch my one and only cinematic homage to baseball over the long Labor Day weekend. It got me thinking about what I believe in when it comes to life and investing, and it wasn’t long before I was on an epic, Crash Davis-esque rant.
“I believe in manager skill. That checkbox due diligence only works if you also have a high EQ for evaluating people. That generalists and specialists should work together to combine the best aspects of myopia and a more holistic, 30,000-foot view. I believe that people who call themselves long-term investors, but who regularly redeem in less than 24 months, are full of crap. I believe that managers who say they can’t find diverse job candidates either exist in ridiculously insulated bubbles or have no imagination. I believe that having less than 10% of hedge funds, mutual funds, venture capital and private equity funds managed by women – who comprise 50% of the population – means we’re missing out on some amazing talent. I believe if all investment managers and all investors agreed to always interview a diverse candidate for jobs/fund searches, it would go a long way towards adding cognitive and behavioral diversity to the industry.
“I believe in downside deviation, maximum drawdowns and time to recovery. I think standard deviation is silly. I believe most investors don’t worry about upside volatility, but that out-of-character positive returns should trigger a monitoring phone call as fast as a losing month. I believe in macro funds, commodity trading advisors and short selling strategies, and that investors should consider these strategies before the proverbial shit hits the investing fan. I think hedging with index options isn’t real hedging, and that taking 8 to 12 months to complete due diligence is like wanting to get pregnant without risking actual sex.
“I think investment conferences should improve the quality of their cocktail party wine. That you should NEVER order the vegetarian option for lunch at an event unless you have a desire to eat something that looks like road kill. I believe in polite but persistent marketing. I think that if you focus on your expertise instead of a sale, you’ll amass greater assets under management (AUM). I believe you should always check time zones before calling a prospect or client, and that texting is NSFP (Not Suitable For Prospects).
“I believe in differentiated networks, niche strategies and cognitive alpha. I believe in gut feelings and spidey senses about people, markets, and investments. I believe in contrarians, and in sticking to your investment guns, as long as you periodically re-visit your thesis to ensure you’re not just stubborn. I believe going to cash takes testicular fortitude. I believe getting back into the market does, too. I believe in good business cards, firm handshakes and not approaching prospects in the bathroom.
“I believe that those funds that don’t get into responsible investing/ESG now will be licking AUM wounds in years to come. I believe that all investment managers make mistakes, and that admitting mistakes and ensuring that they don’t happen again is a mark in a manager’s favor. I believe in strategy continuity, but not necessarily in strategy drift. And that past performance isn’t indicative of future results, but it beats knowing nothing about how strategy translates into returns.
"I believe that most meetings could be emails, and those that cannot should be limited to one hour, tops. Oh, and any meeting that goes longer than one hour should involve snacks.
"Finally, I believe in small funds. New funds. Large funds. Old funds. Women run funds. Minority run funds. White guy run funds. Bread and butter funds. Niche funds. Liquid funds. Illiquid funds. And contrarian funds. I believe there is manager talent and fund utility in all types of funds, and that only by looking at the full menu can investor's hope to have a balanced portfolio meal."
Oh my!
So get back to work all. I hope you enjoyed my little investment rant…pith in the wind if you will. Maybe it will get you thinking about YOUR investment beliefs as we ramp back up into what I think could be a certifiably crazy fall market. Oh, and if you have an investment belief or rant of your own (or a good movie suggestions), feel free to sound off in the comments below.
When I was a young lass in Nineteen Never Mind, I used to spend Christmas Day with my mom and the week after Christmas with my dad. He would come for my sister and me in Tuscaloosa, Alabama and drive us all the way to Ft. Worth, Texas for another week of holiday overeating and unwrapping.
It was about a 12-hour drive, door to door, but we tried to make the best of it. My sister, stepbrother and I would clamber into the “way back” with a cooler full of Cokes,bags brimming with healthy snacks like Pop Rocks, potato chips and Slim Jim’s, nestled securely next to my Dad’s Coors that he snuck over state lines, Smokey & the Bandit-style. There, we’ll loll about (with no seatbelts), stuffing our faces (not dying from the Pop Rock/Coke combo) and alternate singing, sleeping and snarking at one another for the entirety of the 12-hour trip.
At some point, we would inevitably get on my Dad’s nerves. There would be over-the-seat, disjointed swats, strong language and finally a threat to “TURN THIS DAMN CAR AROUND AND TAKE EVERYONE HOME.”
We kids thought that was super funny.
What wasn’t hilarious, however, was 2016 - an epically craptastic annum bad in so many ways that it even made Mariah Carey’s New Year’s Rockin’ Eve performance look apropos.
So, while 2017 is still barely warm, I thought I’d give it a little, tiny warning.
If y’all pull the same stunts this year that you did last year, I’ll turn this year around and take us all home. At the very least, I’ll figure out how to off everyone using nothing but Pop Rocks and warm Coors. You get me?
What am I talking about specifically? Well, here are some of my key investment industry pet peeves from 2016:
Looking in the same tired places for returns, and then pretending shock when they don’t measure up – Investors from Kentucky to New York and a few states in-between reduced or redeemed their hedge fund portfolios in 2016, based in large part on lackluster “average” returns. While many point to “average returns” in the neighborhood of just under 5% though November, perhaps it’s best to look at how the best (and worst) performers are faring. Articles have shown top performing hedge funds gained 20% or more through November 2016. And over the four quarters ending 3Q2016, top HFRI decile funds gained 29.54%. The bottom decile funds lost 15.57%. So there are funds that have performed strongly over the last 12 months IF an investor was willing to look for them and perhaps take risks on lesser known, newer, nicher or funds otherwise “off the beaten path.” It kind of reminds me of the old joke “Doctor, doctor, it hurts when I do this…” How ‘bout in 2017, we stop doing that, lest it continue to hurt.
Using “averages” to talk about investment funds, particularly alternative investment funds – Speaking of, with the kind of return dispersion above, why don’t we stop talking about “average returns” full stop. Even when it comes to white-bread mutual funds, getting fixated on “average” returns doesn’t really help. How do I know? One of the top, non-indexed US mutual funds returned 30% in 2016. Yeah, I said 30-freakin’-percent, more than twice the return of the S&P 500. But by fixating on “average return,” no matter what the asset class, investors may in danger of writing off entire investment strategies based on normalized returns that don’t accurately represent reality. In 2017, let’s focus more on the opportunities unveiled by return dispersion and less on pesky averages, shall we? Oh, and the same thing goes for fees discussions, too.
Saying you want to hire diverse talent, but complaining that you “just can’t find any” – So I’ve heard (or read about) more than one asset management firm complain about how they’d “love to hire women and minorities” but they “just can’t find qualified applicants”, and they’re not willing to lower their standards. Come. On.
Women comprise 50.8% of the U.S. population according to the Census Bureau. Minorities make up nearly 23% of the U.S. population. Do some simple math on the number of women and minorities in a population of 323,127,513 and it boggles the mind that there are ZERO qualified diverse applicants.
Indeed, when I read or hear this, one of a few questions generally comes to mind:
Inappropriate benchmarks – Why, oh why, do we benchmark every damn thing to the S&P 500? It’s become so pervasive that I just caught myself doing it above (the top performing mutual fund invests in small caps, not S&P-level stocks) and I know better. Just because it’s well known, and just because it’s been crammed down our throats by everyone from consultants to financial advisors, doesn’t mean it always fits. Small cap fund? Ixnay on the S&P-ay. Hedge funds? Can’t be expected to outperform in bull markets because they are HEDGED. Private equity & venture capital – comparing illiquid investments to a liquid benchmark seems a bit silly, no? So in 2017, let’s either agree to benchmark appropriately so we can make a sober decision about whether an investment has performed well (or not) OR let’s just decide to sell everything and invest only in the S&P 500, since it’s where it’s at, obviously.
Communicating inappropriately – This may be just a “me” thing, but in 2016 I noted an increasing number of asset managers who text investors. What. The. Actual. Hell. Texting is informal. Texting is immediate and insinuates you deserve an instant response. Texting invites typos. Texting doesn’t allow for compliance review or disclaimers. Unless you are meeting someone that day and need to say you’ll be late, early, or identifiable by the rose in your lapel, or unless that investor has given you express permission to text, don’t. The investors I know who put their mobile numbers on their cards are coming to regret it. And if you lose that, you’ll only spend more time waiting on callbacks.
So cheers, all, to a happy, healthy, prosperous, properly benchmarked 2017. May we lose fewer of my 80s idols and more of our investing bad habits.
Sources:
http://www.valuewalk.com/2016/12/new-hedge-fund-launches-fall-total-capital-increases-record/
https://www.census.gov/quickfacts/table/PST045216/00
Photo credit:
Copyright: <a href='http://www.123rf.com/profile_artzzz'>artzzz / 123RF Stock Photo</a>
Me and my Granny, Christmas morning circa 1973/1974-ish
Well, 2016 has been one helluva year. Between the celebrity deaths (Bowie, Rickman, Prince in particular), fake news, election chaos, Zika, creepy clowns, Aleppo, and a host of other miserable events, I know I won’t look back on 2016 with anything remotely regarding fondness. In fact, I may pretend this year didn’t even happen, therefore reducing any future therapy bills and bolstering lies about my real age.
But alas, as much as I wish I could be Queen of de-Nile, I’m afraid 2016 did happen, and I have the blogs to prove it.
So if you need a good year-end chuckle to survive the holidays, the Electoral College vote, or your boozy office fete, or if you’re just craving random info and snarky rants about the investment industry, I’ve got just what the doctor ordered.
Here’s a complete wrap up of all my blog postings, by topic, for 2016. Enjoy them while you rock around the Christmas tree, drink your Gin and Tonica, or however you plan to celebrate the season.
See y’all next year!
Hedge Funds (Don’t) Suck
http://www.aboutmjones.com/mjblog/2016/11/1/killer-kittens-the-decline-of-hedge-fund-returns (Why you’re more likely to be injured by your toilet than get busted by the SEC)
http://www.aboutmjones.com/mjblog/2016/9/6/you-cant-handle-this-hedge-fund-truth (Perception versus reality in the world of hedge funds, told with pictures)
http://www.aboutmjones.com/mjblog/2016/5/17/hedge-fund-truth-dont-believe-everything-you-read (Animated blog about hedge fund fees, returns and the so-called talent shortage)
http://www.aboutmjones.com/mjblog/2016/2/29/the-hedge-fund-headline-predictorator (Using hedge fund headlines (13-Fs, Rich List, etc.) to tell time and seasons)
http://www.aboutmjones.com/mjblog/2016/2/22/person-or-people (Why we tar the investment industry with a big brush, and how that can hurt performance in the long run)
http://www.aboutmjones.com/mjblog/2016/9/20/can-this-hedge-fund-relationship-be-saved (The hedge funds people fell in love with 2000 to 2002…well, they’ve changed…)
Behavioral Finance
http://www.aboutmjones.com/mjblog/2016/8/16/thank-god-what-you-see-isnt-all-there-is (The bias of “what you see is all there is” and why that makes us think returns are lower than they are)
http://www.aboutmjones.com/mjblog/2016/7/19/great-expectations (Matching investor expectations to reality. Matching money manager expectations to reality)
http://www.aboutmjones.com/mjblog/2016/8/2/a-picture-is-almost-worth-1000-words (Truly terrible drawings that illustrate the “streetlight effect” and how we end up looking in the wrong place for strong performance)
Diversity And Investing
http://www.aboutmjones.com/mjblog/2016/11/15/lenny-bruce-is-not-afraid (A post election blog that covers the importance of diversity, ESG, thinking before you talk to investors and a long-term investment strategy)
http://www.aboutmjones.com/mjblog/2016/7/5/and-now-for-something-completely-different (How cognitive, behavioral, structural and network diversity can benefit investors in hedge funds, private equity and venture capital)
http://www.aboutmjones.com/mjblog/2016/6/7/the-five-ps-of-gender-parity (Solutions for getting more women into the investment industry)
http://www.aboutmjones.com/mjblog/2016/1/25/no-quick-fix (The many unconscious biases men AND women have to overcome to achieve gender parity in investing)
http://www.aboutmjones.com/mjblog/2016/1/4/nostradamnus (Why the low return environment heading into 2016 may require some creativity on the part of investors re: active management, diversity, and emerging managers)
Emerging Managers and/or Capital Raising
http://www.aboutmjones.com/mjblog/2016/12/6/the-five-stages-of-emerging-manager-grief (Denial, anger, bargaining, depression and acceptance all figure into your capital raising experience)
http://www.aboutmjones.com/mjblog/2016/10/4/seed-me-seymour (The truth and consequences of seed capital)
http://www.aboutmjones.com/mjblog/2016/7/5/and-now-for-something-completely-different (How cognitive, behavioral, structural and network diversity can benefit investors in hedge funds, private equity and venture capital)
http://www.aboutmjones.com/mjblog/2016/6/21/capital-raising-crimes-punishment (Don’t be guilty of these capital raising crimes or pay the price of low AUM).
http://www.aboutmjones.com/mjblog/2016/4/5/are-you-hot-or-not (Evaluating a new fund launch – what makes some sizzle and others fizzle?)
http://www.aboutmjones.com/mjblog/2016/2/14/at-your-service (Choosing your service providers)
http://www.aboutmjones.com/mjblog/2016/1/31/making-the-first-move (How to make and keep contact with investors without making them hate you)
http://www.aboutmjones.com/mjblog/2016/1/4/nostradamnus (Why the low return environment heading into 2016 may require some creativity on the part of investors re: active management, diversity, and emerging managers)
Random Musings
http://www.aboutmjones.com/mjblog/2016/11/15/lenny-bruce-is-not-afraid (A post election blog that covers the importance of diversity, ESG, thinking before you talk to investors and a long-term investment strategy)
http://www.aboutmjones.com/mjblog/2016/1/18/money-manager-advice-dont-panic-but-do-bring-a-towel (What 2016 may bring - fee pressure, market volatility, few changes to the regulatory regime until after the election)
http://www.aboutmjones.com/mjblog/2016/5/3/kicking-the-buckets (Do strategy and style buckets help or hurt us? Getting past a checkbox mentality)
http://www.aboutmjones.com/mjblog/2016/4/18/you-are-so-money (Money manager horoscopes - don’t ask!)
http://www.aboutmjones.com/mjblog/2016/3/14/money-manager-report (How to effectively evaluate money manager performance without getting caught up in your benchmark underpants.
http://www.aboutmjones.com/mjblog/2016/10/18/sleepless-in-nashville (The things about the investment industry - hedge funds, private equity, venture capital, real estate, investment advisors, etc. - that keep me up at night)
http://www.aboutmjones.com/mjblog/2016/1/4/nostradamnus (Why the low return environment heading into 2016 may require some creativity on the part of investors re: active management, diversity, and emerging managers)
ESG/Socially Responsible Investing
http://www.aboutmjones.com/mjblog/2016/11/15/lenny-bruce-is-not-afraid (A post election blog that covers the importance of diversity, ESG, thinking before you talk to investors and a long-term investment strategy)
http://www.aboutmjones.com/mjblog/2016/2/7/ucee2gr6omdig0e5vtpsbx8qra738m (Predicting more interest in socially responsible/ESG investing, different pathways to fund management jobs, and a break from paper and PDFs)
November has been, at least thus far, a month of surprises.
You know that curse on the Chicago Cubs? Surprise! They won the World Series.
Didn’t I just see a Facebook post on a local norovirus (aka the stomach flu) outbreak? Surprise! I temporarily had to rename myself Vomitola Khomeni – and finally found that button I ate when I was three…
Hey! Do you remember all those polls that showed Democrat Hillary Clinton easily winning the White House? Surprise! Donald Trump is the 45th President of the United States.
Oh, and of course you recall all the dire predictions for the stock market should Donald Trump win the presidency? Surprise! The Dow Jones Industrial Average was trading in record-making territory a mere two days later.
To be honest, while I did spend much of the first part of the week “enjoying” my virus-induced weight loss opportunity, I also, if somewhat dimly and feverishly, realized that collectively we have done a terrible job of predicting recent events.
I know many in the financial industry had to have been stunned and dismayed by the election results. According to an October 26, 2016 article in Fortune, Trump raised $239,250 from hedge fund and private equity firms, while Hillary Clinton raised $45.2 million from the same groups. Charles River Ventures, a Silicon Valley venture capital firm even went so far as to entitle a blog posting “F*CK TRUMP.” Even though Republicans in other races enjoyed healthy and widespread financial industry support, it just wasn’t there for Trump.
As a result, for many people, last Wednesday morning must have seemed like the end of the world (as we know it). And while I didn’t notice any birds, there were even “snakes and aeroplanes” for any still doubting the seriousness of the situation. (https://www.theguardian.com/environment/2016/nov/08/snake-on-a-plane-passengers-flight-mexico-city)
So where do we go from here? How does the investment industry successfully navigate the new normal and survive and thrive in a new world order? Here are a few thoughts I had that may help investors and managers both do good while they do well.
One: Don’t Say Or Write Anything That Endangers Your Current AUM
This was a contentious election. Combative. Testy. Belligerent. Factious. Antagonistic. Insert every single synonym for “unpleasant and argumentative” you can come up with here, because no matter how you slice it, the 2016 political campaign was a dumpster fire, starting with the Republican and Democratic primaries and continuing through the general election. It. Was. Not. Pretty.
As a result, there are a lot of very strong post-election feelings on both sides of the aisle.
And as we extend our personas over Facebook, Twitter, Blogs, Instagram and other platforms, there has simultaneously been a reduction of social restrictions and inhibitions known as the “Online Disinhibition Effect.” It makes us more likely to say, write or post things that we likely wouldn’t have before.
When you combine those things – deep disappointment, hurt feelings and increased disinhibition – you end up with an improved likelihood of offending someone, inadvertently or otherwise. And when you seriously offend a client or prospect in this industry, your AUM suffers.
So lock down your Facebook account if you post politically on it. Don’t assume you know what someone’s views may be unless they’ve actually told you what their views are. In fact, to the extent that politics and social issues don’t impact your investment strategy or portfolio, don’t talk about them in professional settings. At all. Better safe than sorry because it’s easier to keep a client/investor than to acquire a new one.
Don’t believe me on this one? Ask Matt Maloney, who’s firm, GrubHub, suffered share price losses of 9.4% in the two days after the election over a leaked internal communiqué. Shut. It.
Two: Consider Diversity In Hiring and Investing
This election cycle has been, at least in part, about disenfranchisement. Trump likely won the election due to the disenfranchisement of the white, working class rural voter, while those who fear pending disenfranchisement (minorities, women, immigrants, LBGTQ) have fueled protests post-election.
The good news for investors and money managers is that inclusion will ease disenfranchisement, and it can also make everyone richer, too. Here’s how:
Certainly, in a rapidly changing world, having better problem solving skills and potentially better returns has to be a good thing, right? So cast a wide net when hiring staff or money managers going forward to maximize your cognitive alpha.
Three: It’s Still A Great Time To Focus On ESG Factors
So, early reports have the newly-elected administration throwing out both the Environmental Protection Agency and the CFPB, as well as doing away with Dodd-Frank, among other regulatory changes. While it’s too early to know whether and when that can or will happen, there are a few things we do know:
It seems reasonable that ignoring ESG factors can cost you both potential returns and clients, and possibly increase portfolio risks. And even if there aren’t dedicated regulations or government bodies watchdogging, it also seems reasonable to assume that many investors (and the markets) WILL still care.
Four: Don’t Make Any Sudden Investment Moves
The Sunday before the election, I had a sudden Han Solo moment (“I’ve got a bad feeling about this…”) and decided that I needed to think about buying an inverse S&P ETF. I gave myself 24 hours to ponder and ultimately decided to stay my current course and not change anything in my investment portfolio. Lucky me, right? That single choice would have cost me. Bigly.
Humans want certainty. In a study published in Nature Communications, knowing there is a small chance of getting an electrical shock causes more stress than knowing you’ll be shocked.
Shocking!
But seriously, when you’re feeling uncertain about your investment strategy, take a moment. Take a walk. Take a breath. Take a sip. Take whatever step back you need before making any sudden investment decisions. Whether you’re an investor or a money manager or just a Star Wars fan with a retirement account, it’s important to remember that we generally invest for the long-term. Don’t risk your long-term goals chasing short-term “certainty.”
As for me, I’m taking my own advice. Right after I get back to my 80s roots, dig out my mismatched Converse high-tops from the very back of the closet, and have a 3-minute R.E.M.-party to dance it out. I invite you all to do the same.
Sources: http://fortune.com/2016/10/26/trump-hillary-clinton-hedge-fund-campaign-finance/
http://seekingalpha.com/news/3223875-grubhub-minus-5_8-percent-following-ceos-anti-trump-commentary
https://www.scientificamerican.com/article/how-diversity-makes-us-smarter/
http://corporate.morningstar.com/US/documents/ResearchPapers/Fund-Managers-by-Gender.pdf
https://www.hedgefundresearch.com/family-indices/hfri#
https://www.gsb.stanford.edu/insights/diverse-backgrounds-personalities-can-strengthen-groups
http://fic.wharton.upenn.edu/fic/papers/12/12-14.pdf
http://www.evostc.state.ak.us/%3FFA=facts.QA
https://www.ucl.ac.uk/news/news-articles/0316/290316-uncertainty-stress
It’s that time of year again. The leaves are turning pretty colors. Kids are back in school. There is a real possibility of leaving my air-conditioned Nashville home without my glasses fogging upon hitting the practically solid wall of outdoor heat and humidity. And like any good Libra lass, I’m celebrating a birthday.
That’s right, it’s time for my annual orgy of champagne, mid-life crisis, chocolate frosting and introspection. Oh, and it’s time to check the batteries on the smoke detectors – best to make sure those suckers are good and dead before I light this many candles.
One of the things I’ve noticed in particular about this year’s “I’m old AF-palooza” is how much time I spend thinking about sleep. On any given day (and night), I’m likely to be contemplating the following questions:
I even bought a nifty little device to track and rate my sleep (oh, the joy’s of being quantitatively oriented!). Every night, this glowy orb tracks how long I sleep, when I wake, how long I spend in deep sleep, air quality in my bedroom, humidity levels (in the South – HA!), noise and movement.
To sleep, no chance to dream
Yes, I’ve learned a lot about my nocturnal habits from my sleep tracker – for example, I move around 17% less than the average user of the sleep tracking system, I’m guessing due to having two giant Siamese cats pinning me down - but the one thing I didn’t need it to tell me was that I SUCK at sleep.
I’m not sure when I went from “I can sleep 12 hours straight and easily snooze through lunch” to “If I fall asleep RIGHT NOW I can still sleep 3 hours before my flight….RIGHT NOW and I can still get 2.75 hours…1.5 hours….” but it definitely happened.
I don’t drink caffeine. I exercise. I bought a new age aromatherapy diffuser and something helpfully called “Serenity Now” to put into it. I got an air purifier, a new mattress and great sheets.
But no matter what I try, I am a terrible sleeper.
I’ve concluded that it must have something to do with stress. I do spend an inordinate amount of time thinking about life, the universe and everything, so perhaps that’s my problem.
So in honor of my 46th year on the planet, I decided to compile a list of the top 46-investment related things I worry about at night. They do say admitting the problem is the first step in solving it, after all.
In no particular order:
Yep, looking at this list it’s little wonder that sleep eludes me. If anyone can help alleviate my “invest-istential” angst, I’m all ears. In the meantime, feel free to suggest essential oils, soothing teas and other avenues for getting some shuteye.
Sources and Bonus Reading:
Asset flows to ETFs: https://www.ft.com/content/de606d3e-897b-11e6-8cb7-e7ada1d123b1
Recent HF Performance (buried) http://www.valuewalk.com/2016/10/hedge-fund-assets-flows/
HF Replication: http://abovethelaw.com/2016/10/low-cost-hedge-fund-replication-may-threaten-securities-lawyers/
Average HF Fees: http://www.opalesque.com/661691/Global_hedge_funds_slicing_fees_to_draw_investors169.html
Political Agendas & Investing: http://www.njspotlight.com/stories/16/10/03/murphy-adds-plank-to-platform-no-hedge-funds-in-pension-and-benefits-system/
Asset Gathering vs. Investment Mgmt: http://wealthmanagement.com/blog/client-focused-fas-more-profitable-investment-managers
World's Largest PE Fund: http://fortune.com/2016/10/15/private-equity-worlds-largest-softbank/
Spurious Correlations: http://www.bloomberg.com/news/articles/2016-10-14/hedge-fund-woes-after-u-s-crackdown-don-t-surprise-sec-s-chair
Short-Term Thinking - 5 Months Does Not Track Record Make: http://www.cnbc.com/2016/10/14/venture-capitalist-chamath-palihapitiyas-hedge-fund-is-outperforming-market.html
How many times have you sat through a panel presentation at an investment conference only to be bored out of your damn mind by one session or another?
The topic of the session doesn’t matter. It can be a session on anything from the tax treatment of investments to investors writing actual checks to fund managers on stage - investment porn if you will.
Indeed, there is only one thing that can kill a panel discussion faster than Raid kills roaches: overwhelming consensus.
“I agree with the prior panelists that (restate what you’ve just heard).”
“I agree with the prior three panelists that (restate again what you’ve just heard two times already).”
“Bob, do you have anything to add here?” “Well, I actually agree with Pat and Mary and that gentleman in the audience…”
C’mon, you know you’ve been there. And whether you’re in the audience or actually on the conference stage, a part of you wants to pick up a chair, throw it, and start chanting “Jer-ry! Jer-ry! Jer-ry!”
Ok, maybe that’s just me.
Now don’t get me wrong, generally I’m a fan of consensus. Consensus over where to eat dinner, what bottle of wine to order, whether or not a particular outfit makes my butt look big - these are good things on which to have input and universal agreement.
But when it comes to investing, I look for a few renegades, rogues and innovators and prioritize utility over unanimity, potential benefit over style and strategy boxes, because that's where excess value lives.
Last week, Palgrave, the publisher of my 2015 tome Women of the Street: Why Female Money Managers Generate Higher Returns (And How You Can Too), and I launched a Twitter poll. Roughly 130 Tweeters (Twitterers?) responded to the question: “Why do you think gender diversity is important in investing is important?”
This multiple-choice poll offered the following options for answers: Underrepresentation, Higher Returns, Diverse Behavior/Views, and Not Important.
The winning answer (39%) in the poll was “Diverse Behavior/Views”, which was great because that’s essentially my book in a nutshell, and I love the smell of validation in the morning.
I was, however, somewhat stunned that the second most popular answer (30%) was “Not Important.”
Uh, what? How can diverse views and behavior NOT be important in this industry? After all, the investment industry is overwhelmingly Caucasian, male and 35+, and the fund landscape (no matter what the asset class) is dominated by a few large investment firms …and if that ain’t a prime breeding ground for painful consensus, I don’t know what is.
Look, it’s undeniable that some level of consensus is necessary in investing (otherwise you will own a stock, company, bond or other instrument that never increases in value 'cos no one agrees with you about the value), but when we drift towards overwhelming consensus, I believe our ability to make money is diminished. And nothing pisses me off like missing out on returns.
Let’s take venture capital, for example.
That's a whole heapin' helpin' of consensus.
To oversimplify a bit, that means you end up with a Venn Diagram of geography, network and industry that looks a lot like the one below, where anything that is overlapping spells some level of competition (higher valuations, similar concepts, etc.).
(c) 2016 MJ Alts
But start to change even one thing around and you could end up with increased opportunity. What if you look at the same industries and you went to Harvard, but you focus on, I don’t know, the Southeast, for example? Would it make sense that you might find some highly interesting investments that others might not, or are all the good ideas on the coasts? Or maybe you change your network. With so little capital directed to women and minority entrepreneurs, what if you cultivated a different network (or hired people with differentiated networks) to find out-of-the-box opportunities? Could that open up a new avenue for excess returns? The capitalist in me says, “Yes!” Differences can be good.
(c) 2016 MJ Alts
The same types of things happen in other parts of the investment spectrum, too. I’ve discussed in prior blogs research showing that long-only “benchmark huggers” have less chance of outperformance, (http://www.aboutmjones.com/mjblog/2016/5/3/kicking-the-buckets) and if you think about it, the same should generally be true for hedge funds.
For example, equity hedge funds make up roughly 30% of the overall hedge fund universe by number, and roughly 40% by assets under management. Many of these funds focus on US investment markets, and the vast majority are also managed by white males. This creates a universe of funds that potentially has a similar universe of investment opportunities, similar information available and similar behavior patterns, which can limit outperformance. By modifying one aspect, behavior for example, could we open ourselves up to a differentiated or even higher return? What if we looked at *truly* different strategies? What if…?
(C) 2016 MJ Alts
(c) 2016 MJ Alts
Now, don’t get me wrong. I am not anti-anything that generates (or exceeds) my expected return, and the reason that assets tend to concentrate the way they do is that those firms, industries, strategies, etc. often have a history of success.
But as an industry watcher, I can’t help but wonder what kinds of returns would be possible if investors and asset management firms changed their perspective just a bit and took a road less traveled every once in a while. If we wondered less about how much an investment or new hire or strategy looks like past success and instead asked how it is differentiated and could contribute to our overall success. I’m guessing we’d end up with increased diversification, higher returns and a myriad of other tangential benefits, not the least of which is fewer torturous panels.
Sources:http://www.theatlantic.com/technology/archive/2016/01/global-startup-cities-venture-capital/429255/ , http://www.forbes.com/sites/niallmccarthy/2016/06/27/which-industries-attract-the-most-venture-capital-infographic/#4b07db986778, https://pitchbook.com/news/articles/harvard-4-other-schools-make-up-most-mbas-at-pe-vc-firms
A few weeks ago, I attended an interesting and informative event on women and investing. One of the sessions was focused on how to increase gender parity within the investment industry. The discussion eventually coalesced around five key drivers of diversity in investments: Pipeline, Parenting, Presence, Pay and Promotion.
Because of the research I’ve done on gender and investing, and, let’s face it, because I am an opinionated and often colorful commentator on all things investing, I get asked one question a lot.
What can we do to fix the gender imbalance in investing?
I think some people expect me to come up with a quick and pithy hack to fix the problem. Something akin to Ronco’s “Set it and forget it!”
It’s likely that some folks want me to utter the dreaded Q word (“quota”), although they should really know by now that’s just not how I roll.
A very, very few want me to say “there is no problem” so they can get back to other matters.
But almost no one really wants to hear the truthful answer to the question, which is this: “I’m not sure what the answer is.”
One thing I am positive about is that the answer is as complex as the problem, much of which is rooted in bias. Now this is not necessarily your grandparent’s or even your parent’s bias. Thankfully the days where consumers were likely to be treated to an ad like this are gone.
But if you are human, you have bias. Period. And here’s how those biases (both men’s and women’s) might be impacting the number of women in investing:
It Starts Early – A study by Jane Stout, Nilanjana Dasgupta, Matthew Hunsinger, and Melissa A. McManus of UMass Amherst found one of the reasons women may not pursue math is rooted in bias. When faced with a male math professor, 11% of women attempted to answer questions posed to the class at the beginning of the semester. At the end of the semester, that number dropped to 7%. In contrast, female students only attempted to answer questions posed by a female professor 7% of the time at the beginning of the semester, but attempted to answer 46% of the time by the end of the semester. Similar trends were shown in other areas of the classroom experience, including after class requests for help, confidence and test taking (http://www.slate.com/articles/health_and_science/the_hidden_brain/2011/03/psychout_sexism.html) With less than 1 in five math & science professors at top universities women, it is easy to see that the pipeline could narrow early.
The Pipeline Shrinks Further - In 2014, only 37% of MBA applicants were women, and of those, only 6% pursued investment banking compared with 11% men in that field. Also in 2014, 77% of investment analysts were men, who were 20.3% more likely to get an early analyst offer than women. A 2011 Vault study of the largest investment banks in the US found only 25% of staffers were women, 11% of executives were women and only 3% of CEOs at these firms were women per Catalyst. While it is difficult to single reason for these low numbers, culture, mentorship, appeal, and a lack of role models likely all come into play.
Hiring Hurdles – Early last year, Marc Andreessen took copious amounts of, um, “poop” for stating that he has no female partners at his firm because he’s tried to hire one and each time she turned him down. Obviously, there must be more than one qualified female applicant out there, so why isn’t a venture capital magnate like Andreessen seeing them? Part of may spring from the bias in the hiring process.
A study published in the American Psychological Association called, “Evidence That Gendered Wording in Job Advertisements Exists and Sustains Gender Inequality” showed that subtle word choice differences in job postings impacted who responded to those postings. For example, the following ad (http://www.eremedia.com/ere/you-dont-know-it-but-women-see-gender-bias-in-your-job-postings/#) was re-written with feminine and masculine themed words. The feminine ad, perhaps not surprisingly, attracted more women applicants. Now think about the ways we tend to describe asset managers and perhaps it’s not so mysterious why the pipeline has historically sucked.
Assuming that women do apply for an investment role they have to make it through the resume gauntlet. A recruitment firm created a resume and sent it to 1000 hiring managers. Half of the resumes were attributed to Simon and half were attributed to Susan. At large firms, Simon was preferred over Susan 62% to 56%. Women hiring managers felt Susan matched 14 of 20 job attributes, while Simon matched six, and male hiring managers felt exactly the opposite. (http://www.news.com.au/finance/work/careers/the-same-resume-with-different-names-nets-different-results/news-story/a2a182fb4570e948c27ce63139ee66b1) The upshot? Bias, bias everywhere.
Promotional Considerations – If women do enter the investment arena, they then still have to work their way to the top. Even workplaces like Barclays Capital, who just shared they now employ more women than men (51% to 49%) struggle when it comes to women in the C-suite: 80% of top level positions at Barclays are held by men. The list of potential reasons for this are endless, but a great list can be found in this article, http://www.businessinsider.com/subtle-ways-women-treated-differently-work-2014-6, which details the biases women face when climbing the corporate ladder. Chief among them? Mommy track, networking opportunities, participation in meetings (air time, interruptions), expressing displeasure, etc.
At the end of the day, it is supremely difficult to find a simple fix to these issues. Unconscious bias is, in a way, more difficult to deter because it’s, well, unconscious. These behavioral patterns are pretty inaccessible to the conscious mind and therefore can be very difficult to change.
However, for those firms that are looking to improve their diversity metrics, or those investors who are looking to improve their ratio of male to female money managers, it can be helpful to at least recognize where some of the issues arise and to take steps to guard against the biases where we can. For example, there is software that can create “gender neutral” job postings. Blind resumes can help avoid the Simon-Susan conundrum. Having mixed teams of interviewers can help to balance male and female hiring and promotion biases. Groups like Rock the Street Wall Street (http://www.rockthestreetwallstreet.com) and Girls Who Invest (http://www.girlswhoinvest.org) can help young women overcome their own biases towards math and finance. Certainly, there are a lot of changes required, but they could potentially add up to better gender diversity over time.
To be clear, no woman I know is asking for special treatment when it comes to hiring of any kind (employment, fund selection, etc.). Every single woman with whom I speak wants to earn their place in investment management and is willing to get scrappy when required. But, in the immortal words of Paul Simon, women do want to know that the “cross is in the ballpark.” Until we can all figure out how to mitigate some of our biases, that may be hard to ensure.
Sources: In addition to those cited throughout - Graduate Management Admissions Council, Universum, http://www.songfacts.com/detail.php?id=5492
As y’all recover from the excesses of fried turkeys, stuffed stockings, too much ‘nog and an overdose of family time, it seems like a good time to catch up on some light reading. So, in case you missed them, here are my 2015 blogs arranged by topic so you can sneak in some snark before you ring in the New Year.
Happy reading and best wishes for a joyous, profitable, and humorous 2016.
Happy Holidays from MJ Alts!
HEDGE FUND TRUTH ANIMATED SERIES
http://www.aboutmjones.com/mjblog/2015/6/29/hedge-fund-truth-series-hedge-fund-fees
http://www.aboutmjones.com/mjblog/2015/6/1/the-most-hated-profession-on-earth
http://www.aboutmjones.com/mjblog/2015/3/2/the-hedge-fund-truth-launching-and-running-a-small-fund
http://www.aboutmjones.com/mjblog/2015/1/19/savetheemergingmanager
WOMEN AND INVESTING
http://www.aboutmjones.com/mjblog/2015/12/13/dear-santa
http://www.aboutmjones.com/mjblog/2015/11/16/not-so-fast-times-at-hedge-fund-high
http://www.aboutmjones.com/mjblog/2015/9/25/doing-well-doing-good-improving-investment-diversity
http://www.aboutmjones.com/mjblog/2015/7/26/the-evolution-of-a-female-fund-manager
http://www.aboutmjones.com/mjblog/2015/6/10/advice-to-the-future-women-of-finance
http://www.aboutmjones.com/mjblog/2015/4/27/diversification-and-alpha-by-the-book
http://www.aboutmjones.com/mjblog/2015/1/26/dont-listen-to-greg-weinstein
EVERYONE HATES ALTERNATIVE INVESTMENTS (ESPECIALLY HEDGE FUNDS)
http://www.aboutmjones.com/mjblog/2015/12/7/keen-delight-in-the-misfortune-of-hedge-fundsand-me
http://www.aboutmjones.com/mjblog/2015/2/2/mfp1glk0exk0vlnqtpx6lby2ba9z8n
http://www.aboutmjones.com/mjblog/2015/11/23/babelfish-for-hedge-funds-1
http://www.aboutmjones.com/mjblog/2015/11/8/hedge-funds-bad-reputation
http://www.aboutmjones.com/mjblog/2015/10/5/dear-hedgie
http://www.aboutmjones.com/mjblog/2015/9/9/investment-professional-fact-fiction-the-business-trip
http://www.aboutmjones.com/mjblog/2015/5/17/hedge-funding-kindergarten-teachers
http://www.aboutmjones.com/mjblog/2015/4/14/are-hedge-clippers-trimming-up-the-wrong-tree
http://www.aboutmjones.com/mjblog/2015/2/16/rampallions-scullions-hedge-funds-oh-my
FUND RAISING & INVESTOR RELATIONS
http://www.aboutmjones.com/mjblog/2015/6/22/swingers-and-the-art-of-investor-communication
http://www.aboutmjones.com/mjblog/2015/4/5/7-secrets-to-a-successful-fund-elevator-pitch
http://www.aboutmjones.com/mjblog/2015/10/26/founding-funders
http://www.aboutmjones.com/mjblog/2015/8/28/crisis-communication-for-investment-managers
http://www.aboutmjones.com/mjblog/2015/7/20/trust-me-im-a-portfolio-manager
http://www.aboutmjones.com/mjblog/2015/5/4/the-declaration-of-fin-dependence
EMERGING MANAGERS
http://www.aboutmjones.com/mjblog/2015/8/17/people-call-me-a-skeptic-but-i-dont-believe-them
http://www.aboutmjones.com/mjblog/2015/10/19/are-you-the-next-blackstone-dont-count-on-it
DUE DILIGENCE
http://www.aboutmjones.com/mjblog/2015/11/1/the-evolution-of-due-diligence
http://www.aboutmjones.com/mjblog/2015/8/6/a-little-perspective-on-the-due-diligence-process
GENERAL INVESTING INSIGHTS
http://www.aboutmjones.com/mjblog/2015/10/11/investment-wisdom-increases-with-age-dance-skills-dont
http://www.aboutmjones.com/mjblog/2015/8/24/the-love-of-the-returns-chase
http://www.aboutmjones.com/mjblog/2015/8/2/slamming-the-wrong-barn-door
http://www.aboutmjones.com/mjblog/2015/6/8/the-confidence-hubris-conundrum
http://www.aboutmjones.com/mjblog/2015/5/10/the-crystal-ball-in-the-rearview-mirror
http://www.aboutmjones.com/mjblog/2015/2/23/pattern-recognition-may-make-you-poorer
http://www.aboutmjones.com/mjblog/2015/1/5/new-years-resolutions-for-investors-managers-part-one
What do you want to read about in 2016? List topics you enjoy or would like to see more of in the comments section below.
In the meantime, gird your loins for the blog that always parties like it’s 1999, even when it’s 2016.
And please follow me on Twitter (@MJ_Meredith_J) for daily doses of research, salt and snark.
