Raising the bar on diversity


The transfer of wealth to women, millennials and Generation Z is increasing the focus on diversity in investment decisions. While research shows that diversity benefits economies, companies and stock performances, the shifting behaviour of asset owners is pushing asset managers more than ever, to address diversity within the industry as well as in their investment processes.

Apr 2019

We are all unique. Diversity acknowledges the multiple dimensions that make us different including race, gender, ethnicity, socio-economic status, age etc.

It has been widely documented that diversity brings benefits to both economies and companies.

Cultural diversity, for example, has been found to be positively correlated with productivity in European countries1. Studies that examined the impact of immigration to the US showed that increases in cultural diversity significantly increased output per capita due to greater variety of workers’ skills2. The positive impact from cultural diversity is also evident in emerging economies. In Bosnia, it is estimated that both personal and family incomes are around 10% higher in ethnically diverse versus ethnically homogenous areas3.

On the gender front, according to the International Monetary Fund (IMF), the economic benefits from including more women in the workforce is over and above the benefits resulting from simply having more workers. This is because similar to different ethnic groups, women bring new skills to the workplace arising from their social interactions, differences in risk preference and response to incentives.4 Research shows that the favourable impact of gender inclusion on economic growth may have been understated by standard models that do not differentiate between genders in their analysis. The IMF postulates that part of the growth that comes from women’s participation in the workforce may have even been misattributed to technology.

The positive impact of gender inclusion on the broad economy is most stark in countries facing rapidly aging populations and/or severe labour shortages. Japan comes to mind. Back in 2014, it was estimated that the absolute level of Japan’s GDP could rise as much as 12.5% if Japan’s employment rate of women rose to the same level as the men’s5. Although Abenomics has helped to drive women employment higher, the employment rate of women in Japan is still 17% below that of the men as of 2017.

The diversity case for companies

Diversity also benefits companies. Diverse teams do better in complex problem-solving tasks as diversity challenges group think, resulting in enhanced decision making, greater adaptability and creativity6.

Improved profitability

Greater gender/ethnic/cultural diversity on both executive teams and boards of directors helps drive business performance. This relationship is statistically significant and has been observed over time and across geographies. Research by McKinsey and Company shows that companies in the top-quartile for ethnic/cultural diversity on executive teams are 33% more likely to outperform in terms of profitability. In addition, companies with the most ethnically/culturally diverse boards are 43% more likely to experience higher profits. See Fig. 1.

Fig. 1. Ethnic diversity is positively correlated with profitability7


The same research shows that companies that have the most gender diverse executive teams are 21% more likely to experience higher profits and 27% more likely to create superior value.

Better customer rapport

Diverse companies that reflect the markets and communities they serve, can better attract and retain customers.

It is estimated that women currently drive 70% to 80% of all consumer purchases as they often buy on behalf of members in their households, extended families and friends. African Americans account for USD1.2 tr in purchases annually in the US although they make up only 14% of the population. Millennials are also becoming a louder voice in society – they currently account for a quarter of the world’s population and are forecast to make up 35% of the global workforce by 2020. Together with Generation Z, they are estimated to account for USD21 tr of income.

Wider talent pool

Besides helping companies to improve their decision-making process and understand their customers better, diversity also gives companies a competitive advantage in the war for talent. Companies that embrace diversity can better attract, develop and retain talent. The 2018 Deloitte Millennial Survey found that 83% of millennials and 80% of Generation Z believe that companies should emphasise diversity and inclusion (D&I) in the workplace, alongside financial performance. Diverse and inclusive workplaces are therefore more likely to attract and retain both these demographic cohorts. Recent highly publicised issues concerning gender and racial discrimination suggest that increasingly for companies, embracing diversity is becoming a license to operate.

The current diversity gap

Despite these benefits, diversity gaps exist. According to the World Economic Forum, it will take 108 years to close the global gender gap and 202 years to achieve gender parity in workforce participation, remuneration and advancement. Many businesses appear slow in developing more inclusive decision-making teams. A survey of 2,500 businesses leaders in 35 countries revealed that while 51% of businesses think that age diversity is important, only 38% viewed gender diversity to be important for business success. Meanwhile, ethnic diversity emerged as the lowest priority of the three characteristics explored8.

In the survey, businesses were asked how many ethnic groups they had in their senior teams – a number less than two means that the senior team was not ethnically diverse. The results in Fig 2. suggest that businesses in general are not ethnically diverse. In terms of age diversity, businesses in developed economies – such as the G7 – seem to place greater emphasis on experience and have fewer younger members in their senior team compared to Africa or Latin America. On the gender front, 25% of senior roles are held by women globally, with Africa, Eastern Europe and the EU faring better. Overall, progress on gender diversity has been slow with only a 1% improvement over the last decade.

Fig 2: Ethnicity, age and gender percentages by region (2018)


Challenges facing the fund management industry

The diversity challenges for the fund management industry are three-fold. Investment managers may need to start incorporating diversity considerations in their investment processes going forward given mounting evidence that diversity drives company profitability and stock performance. There is also the challenge of having to increase diversity within the industry, which historically tends to have disproportionately fewer women and minority groups. Meanwhile, asset owners and end investors are increasingly focusing on diversity when assessing investment managers as well as investments.

Investing in diverse companies

According to Merrill Lynch, US companies that focus on gender diversity at the board and C-suite level consistently achieve higher Return on Equity and lower earnings risk in subsequent years. These companies also generally trade at a premia versus their more homogenous counterparts. In Europe, stocks of companies that have seen rising diversity on boards experience more stable earnings and dividends. In Asia Pacific, stocks of companies that have at least two female board members trade at a premium and have higher net margins as well as dividend yield9.

Tackling diversity within the industry

In a recent industry benchmarking survey, Mercer showed that just 1% of British investment managers are black, compared with 3% for the UK population. The figure appears even more stark in London, the centre of the financial industry, where more than 13% of the population is black. Meanwhile, 38% of the polled investment managers had a private-school education, compared with 7% of the UK population.

In the United States, male fund managers outnumber female fund managers by a ratio of 9 to 1. A study by Morningstar exploring the performance of actively managed US-based equity and fixed income funds show that men and women fund managers deliver equally competitive fund performance, as do mixed gender teams. Hence the low participation rate of women in the fund management industry is not due to performance10.

Responding to asset owners

The behaviours of asset owners are also changing. Globally, more asset owners are requesting Diversity & Inclusion data when assessing investment managers. In a survey by the CFA Institute of more than 800 asset owners, 83% indicated that gender diversity is important to them: 55% believed that gender diversity in investment teams leads to better performance through diverse viewpoints, and the remaining 28% preferred to hire an investment firm with a corporate culture that supports gender diversity11. Another survey of 100 global assets owners, with combined assets of more than USD8 tr reveal that diversity is moving up the agenda with 41% engaging with investee companies on board diversity. See Fig. 3.

Fig. 3. How are asset owners engaging on diversity?12


End investors which include women, millennials and Generation Z are controlling an increasing proportion of wealth and income. These groups are more likely to place greater emphasis on diversity factors when making investment decisions. Women currently account for 32% of global wealth. Their longevity (versus men) also implies that they will enjoy a substantial wealth transfer over the course of their lives. By 2020, women are expected to hold USD72 tr of private wealth.

Meanwhile, investment consultants are uniform in their views on the benefits of diversity. Although diversity is not yet mandate critical, Mercer believes that diverse teams are more likely to outperform and has been looking at how diversity helps in idea generation, avoids group think and reduces risk in portfolio construction13. Going forward, we are likely to see more investment teams shift from a “star portfolio manager” model to a team-based approach.

Mainstreaming diversity

There have been several global initiatives that champion a more inclusive culture within the financial industry. In the US, the House Financial Services’ subcommittee held its first hearing on diversity in February this year, to assess if legislation is needed to boost diversity in the financial industry. In the UK, HM Treasury published the voluntary Women in Finance Charter in 2016 which applies to all financial firms operating in the UK regardless of where their headquarters are located. The Diversity Project meanwhile aims to achieve diversity across all dimensions, including gender, ethnicity, socio-economic background, LGBTI+, age and disability. Organisations such as the Bloomberg Buy-Side Women’s Network in Asia as well as the CFA Women in Investment Management Initiatives seek to improve investor outcomes by encouraging gender diversity in the investment management profession.

Despite the many initiatives to drive diversity, the outcome remains mixed and the urgency is more pressing than ever.

For diversity to be fully embraced, senior leaders of companies need to be fully committed and clearly articulate a fact-based, compelling business case where diversity benefits everyone. Setting measurable goals to establish the baseline for tracking progress and reinforcing accountability are useful tools. Providing training that encompasses simulations to the organisations to uncover their unconscious bias towards gender, age, ethnicity are also important. Ultimately, while improving diversity in asset management needs to be tailored accordingly to each company’s strategy, geographical and sociocultural contexts, the combination of demographics, potential for better performance and the increasing focus from asset owners and possibly regulators will continue to provide momentum for change.

1 Bellini, E., Ottaviano, G. I., Pinelli, D., & Prarolo, G. (2012). Cultural diversity and economic performance: evidence from European regions
2 Cultural Diversity and Economic Growth: Evidence from the US during the Age of Mass Migration. Philipp AGER and Markus BRÜCKNER.
3 Ethnic diversity and economic performance – an empirical investigation using survey data. Adnan Efendic and Geoff Pugh.
4 Economic Gains from Gender Inclusion: New Mechanisms, New Evidence. October 2018.
5 Womenomics 4.0: Time to Walk the Talk. Goldman Sachs. May 2014.
6 EMauboussin, Michael and Dan Callahan (2014). ‘Building an Effective Team: How to Manage a Team to Make Good Decisions.’ Credit Suisse.
7 Delivering through Diversity. McKinsey & Company. January 2018. Average economic profit margin 2011-2015 and average EBIT margin 2011-2015. Results are statistically significant at p-value <0.5. Percentages shown are rounded to the nearest whole number, however, calculation of the differentials in quartile performance uses actual decimal values. Company websites. McKinsey Diversity Matters database.
8 Diversity snapshot: ethnicity, age and gender. Grant Thornton.
9 The She-economy. Bank of America Merrill Lynch. March 2019.
10 Fund managers by Gender. Morningstar Research. March 2018.
11 Driving change: Diversity & Inclusion in Investment Management. CFA Institute.
12 Diversity from an investor’s perspective. New Finance. November 2017.
13 Diversity from an investors’ perspective. New Finance. November 2017.

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