A time-tested active edge
At Vanguard we understand the merits of both active and index investing. The breadth and depth of our experience allows us to determine when indexing is best, and when active investing can make a genuine difference.
Active fund management is a people business. Individual ability and diversity of thought are often seen as key differentiators of fund management teams. And it’s been well established by researchers that teams of individuals who have diverse backgrounds, education and experience tend to outperform teams that are more homogenous1.
However, one aspect of diversity, the gender balance of an investment team, has generally received less attention as a potential driver of performance.
A recent Vanguard research study2 suggests that gender diversity merits greater consideration by the asset management industry. For example, the research found that US active equity funds with gender-balanced investment teams tend to outperform those with teams that are all-male or all-female.
Our research looked at the investment teams of 2,669 US active equity funds from 2008 to 2021. Of 33,600 individuals on those teams, only about 1 in 7 was a woman3. More than half of all the investment teams in our analysis were all-male, while only 2% were all-female. The remaining teams, about 41%, were mixed gender.
We took monthly snapshots of the characteristics of each fund team, then observed the fund’s subsequent 12-month returns, cross-referenced by gender diversity and other characteristics such as education and international experience.
Funds with gender-diverse teams tended to shine. Funds managed by single-gender teams underperformed their benchmarks by 12 basis points (bps) on average, while funds managed by mixed-gender teams outperformed their benchmarks by an average of 10 bps. (A basis point is one-hundredth of a percentage point.)
Performance was strongest for mixed-gender teams where at least half of the team were graduates of top-performing US universities (see chart below), which we used as a proxy for quality of education.
Notes: Top schools are defined as teams with a majority of members graduating from Ivy League universities. Mixed-gender teams are any that include at least one male and one female. From an initial universe of approximately 3,600 US active equity funds, the research was based on the biographical data of 33,600 individuals serving on the investment teams of 2,669 funds. Performance calculated in USD, gross of fees, in excess of the manager-preferred benchmark with income reinvested, 1 January 2008 to 30 September 2021.The individuals on the teams include not only named portfolio managers but all investment professionals who help shape investment decisions, such as research analysts, traders and assistant portfolio managers.
Source: Vanguard, as at 23 March 2022. Past performance is not a reliable indicator of future results.
Our research findings underscore how gender diversity can be seen as an important attribute of a well-qualified, well-trained and diverse team of investment professionals.
As part of our approach to evaluating active managers, we assess a firm’s people as one of the key drivers of success.
We look for strong and diverse portfolio management teams with low turnover. Team diversity is a critical dimension – our view is that diversity leads to better decision-making, helps avoid group think, drives creativity and helps break down barriers.
We take a holistic view of what constitutes diversity, incorporating both identity (gender, ethnic) and experience (background, education), which together should drive diversity of thought.
Our Global Oversight & Manager Search (O&MS) team of more than 25 investment professionals oversees existing external managers and evaluates prospective managers based on the four criteria above.
We find that active managers best positioned for success are those with client-aligned ownership structures, talented teams with diverse perspectives and long-term approaches focused on deep, differentiated research and true stock picking, as opposed to static factor bets.
Wellington Management Company is one of our largest external advisory partners, both by total assets under advice and number of mandates. A major factor in our partnership is the breadth and depth of the firm’s equity research resources, with over 50 global industry analysts (GIAs) who are experts in their respective domains. Unlike at other firms, being a GIA is a career, and many are partners—a distinct aspect of Wellington’s ownership structure and strong succession planning.
Every morning, hundreds of portfolio managers, the GIAs, and other investment professionals — connecting remotely from Wellington offices around the world — gather together to discuss timely investment ideas, many of which end up in Vanguard active funds. Wellington fosters healthy debate, diversity of thought and the free exchange of ideas — conditions that company management believes are essential for informed investment decision making – and the funds that Wellington manages for Vanguard in the UK have well-balanced portfolio management teams.
Our research shows that an investment team’s gender diversity has the potential to meaningfully affect fund performance. In essence, maximising gender diversity may add to the team’s overall strengths.
Vanguard has a long track record in selecting active managers and we believe that the results of our research emphasise the benefits of approaching team diversity with the same rigour as we approach portfolio diversification, recognising the meaningful impact both have on fund performance.
1 This statement refers to a broader set of research on gender diversity that starts with Hoffman and Maier in 1961 which highlights the role that diversity plays in team performance.
2 Diversity Matters: The Role of Gender Diversity on US Active Equity Fund Performance. Vanguard Research, June 2022.
3 Based on investment team data for US active equity funds from January 2008 to September 2021, as compiled by eVestment, LLC, a third-party provider of fund information used for manager selection and screening purposes. While the possibility of non-binary gender was considered, there were no instances in the data where pronouns other than he/him/his or she/her/hers were used.
Investment risk information
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