The Power of Public Attention

Dr Ruth Shaber, Co-founder of the Diverse Investing Collective, explains how and why fund managers should focus on reducing risk by increasing gender diversity.

The journey toward gender equity has been a long and often difficult one. There were times – and in parts of the world these times haven’t passed – when women were denied access to universities. Back then, this was considered ‘normal’. What a loss of talent that was. Thankfully, significant progress has been made in many locations, but the persistence of inequity demands attention.

Much research has focused on women-owned firms, women on boards, or women in senior leadership. While diversity at these levels is important, our analysis at the Diversity Investing Collective focuses on fund managers – who play a crucial role in directing the flow of capital and who are often overlooked. Fund managers make crucial day-to-day investment decisions, ranging from which new business ideas get off the ground in venture capital to how publicly traded companies are held accountable.

We analysed 600 actively managed US funds, representing US$11.6 trillion in assets under management (AUM), or roughly 25% of the estimated total AUM. Of these funds, only 21.3% of the AUM is managed by a team whose members are sufficiently gender diverse (where teams have 33-67% gender diversity). There is a striking absence of diversity in general, and of women in particular. More than half (52.6%) of AUM is managed by all-male teams, while just 2.7% is overseen by all-female teams. The remaining 23.4% is accounted for by the insufficiently diverse teams, predominantly those with less than 33% women.

The spotlight effect: a driver of change

Our research indicated a key marker of change: public attention.

When the funds we analysed were ranked by the largest to the smallest amount of AUM, we found a stark contrast between the top and bottom quarters of the list. In the funds with the most AUM, gender diversity among management teams was one-third higher than in funds with the least amount of AUM. Larger funds naturally generate higher asset-based fees for the management firms and therefore tend to be prioritised in their shop window. While our data is cross-sectional and hence does not allow for a formal test of causality, we observe a strong association between fund size and diversity. This association was independent of fund type (e.g. mutual fund vs separately managed account), asset management firm or asset class.

Such an association suggests a simple yet powerful opportunity. Attention is a lever we can pull. Social media and advertising have long understood its value, treating attention as a bargaining currency where positive effects are expected. In these situations, we can adopt the same approach to foster accountability by shining light on who manages capital, and the impact gender diversity has on risk reduction and fund performance.

The goal: 33% by 2033

We have set an ambitious goal: achieving 33% of fund AUM to be managed by gender-diverse teams by 2033. This 33% threshold is a profitable business imperative. In the financial industry, performance is paramount, and research highlights the role of diversity in driving it.

Research by Professors De Masi, Słomka-Gołebiowska and Paci shows that when women constitute at least one-third of a team (e.g. a board), group dynamics shift, decision-making improves, delivering stronger financial results, including higher returns on equity. The research in a book I co-authored The XX Edge: Unlocking Higher Returns and Lower Risk demonstrates that there are higher returns and less risk when women are at financial decision-making tables, across all asset classes.

Achieving this 33% target will require an annual increase of 1.3% in gender-diverse teams – a pace that demands sustained public and investor focus. The collective is working to hold the investment industry accountable with its Transparency Dashboard, where we will measure progress toward the 33% goal.

Who controls capital shapes the future

The current reality is stark: only 21.3% of AUM is managed by sufficiently gender-diverse teams, while the majority is controlled by all-male teams. This imbalance should concern investors because diversity directly impacts financially material risks as research by Professors Godfrey, Hoepner, Lin & Poon has shown. It’s well-known that portfolio diversification reduces risk. The same principle applies to team diversification.

Many investors, such as public pension funds who represent teachers (predominantly female) or public employees (higher representation of people of colour), increasingly want their investment teams to reflect their members. Similarly, wealthy US individuals and foundations who have philanthropic missions to advance gender equity and other justice-focused missions increasingly would like the teams managing their assets to reflect the diversity of the US. Only by highlighting the persistent lack of diversity in asset management can these investors take action to call for more women and other underrepresented groups to control their capital.

We should leverage the power of public attention to hold the financial industry accountable. Fifty-five asset owners and allocators with US$74 billion in cumulative AUM have signed a letter to the 20 largest asset management firms calling on them to disclose the gender and racial make-up of their fund management teams to shine a light on the lack of diversity in asset management. Savvy investors should consider signing on as well, and reach out to their fund management teams to request more data and action around the diversity of the teams managing their money. Given the clear evidence of improved performance, it’s their fiduciary duty to do so.

How much talent was wasted when women were denied access to universities? Today, the talent pool is diverse: How much profit has been left on the table by failing to diversify decision-making teams? These are questions we cannot afford to ignore.

Thirty-three percent by 2033. Who controls capital shapes the future. The spotlight is ours to hold.

This article was co-authored by Banhishikha Chakraborty, Andreas Hoepner, Katharina Hoepner, Evangelina Mosqueda, Adewale Oduye and Robyn Russell.

The post The Power of Public Attention appeared first on ESG Investor.