Short Take

You Have Women on Your Board? Gender Inequality and the Choices of Foreign Fund Managers

Henry Friedman matches investment data and country rankings on treatment of women

It is hard to imagine a global industry with a more impenetrable glass ceiling than money management. A survey of more than 15,000 fund managers worldwide found that, on average, women run just 15 percent of portfolios.

As if that lack of diversity isn't bad enough, among the boys' club of foreign fund managers, UCLA Anderson's Henry L. Friedman found, gender bias can creep into portfolio management. Managers based in countries where gender inequality is still very much a problem tend to underinvest in U.S. companies that have more women serving on the board of directors. To be clear, "more" does not mean gender parity: In Friedman's database women held just 14 percent of U.S. board seats at the companies owned by the foreign fund managers.

Friedman parsed the U.S. stock holdings of 18,000 international funds between 1998 and 2011. Digging into U.S. equity investments unearthed a level playing field on which to compare fund managers from different countries.

Given that the heart of the study was to ascertain active bias among managers, Friedman first had to weed out passively managed index funds from his database. He opted to include only funds that owned fewer than 100 stocks, on the premise that passive index funds tend to hold hundreds of stocks. The average portfolio had 46 U.S. stocks.

Funds were assigned a country-level gender-bias rating based on data from the United Nations' Gender Inequality Index (GII), which assesses economic, social and health issues, including maternal mortality rates, government seats held by women, education level and workforce participation. The GII data are rolled up into a number ranging from zero to 1.0. The higher the number, the greater the gender inequality. Sweden (0.05) and Denmark (0.06) had the least gender bias. India (0.62), Swaziland (0.55) and South Africa (0.49) were the most gender biased.

"Funds from countries with greater gender inequality tend to tilt their portfolios away from firms with a greater fraction of female directors on the board," Friedman reported in "Investor preference for director characteristics: Portfolio choice with gender bias."

The bias is subtle. Friedman modeled the impact on how a 12 percent increase in female representation on a company's board of directors would impact a fund from a country with low gender bias (0.106, 25th percentile) and a fund from a country with a high level of gender bias (0.286, 75th percentile). A fund with higher bias clocked in with an allocation that was 14 basis points lower than a fund from a country with less gender inequality.

That's a small effect, roughly the same as the preference, say, for an independent board among fund managers. "While modest, the magnitude of the effect of gender bias on portfolio choice is on the order of the estimated effect of board independence on funds' portfolio choices," Friedman reported.

And even a small bias against a stock can affect its price and valuation relative to that of others. Friedman used Tobin's Q as his proxy for stock performance. Tobin's Q is a calculation that divides a company's current market value by the book value of its assets. He found that a 10 percent increase in the fraction of female directors resulted in a Tobin's Q for stocks held by highly biased funds (75th percentile) that is 1 percent lower than the Tobin's Q for stocks held by funds from countries with lower (25th percentile) gender inequality. In a show-me-the-money world, that could lead corporate management to seek less board diversity, not more.

Perhaps gender-biased investing, as manifested in board diversity, makes more money for the fund managers? Um, no. Friedman ran the numbers to see if managers in countries with greater inequality — and thus greater gender bias in their U.S. equity holdings — had better performance, or attracted more assets (important in an industry that charges fees as a percentage of assets under management). He found "no evidence that gender-biased tilting is associated with excess returns or increases in funds' net assets, which suggests that gender-biased portfolio tilting is driven by biases and preferences rather than economic benefits to fund managers."

Henry L. Friedman

Assistant Professor of Accounting

Henry Friedman's research interests relate broadly to how information is produced and used in firms and capital markets involving issues related to incentive provision, price formation, managerial expropriation and investor beliefs. He has investigated interactions between incentive compensation, reporting quality and the role and responsibilities of the CFO, with an emphasis on the effects of CEO power over the CFO in the reporting process.


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