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Can Gender Diversity Lead to Better Returns?

November 15, 2021 4 min 17 sec

Text transcript

Jason Smith, I’m a managing director and a Portfolio Manager at Rothschild Asset Management.

So Rothschild & Co started up a gender diversity strategy. And this gender diversity strategy invests in companies that support gender diversity in the boardroom, across senior management and through their corporate policies. We believe these companies benefit from an improved culture where employees are motivated and enabled to grow and contribute within an organization, which reduces turnover and improves productivity.

These corporations also benefit from improved collective intelligence due to better balance of perspective, mindset and experience, leading to better decision making. There’s also empirical evidence supporting higher profitability and better earnings growth from companies with higher board diversity, supporting the theory that diversity matters. In addition to assessing gender diversity factors, investments also need to exhibit other important fundamental attributes that the team believes support a good investment. We look for companies that are attractively valued versus its peer group, its own history, and versus its future earnings power. Fundamental research focuses on fully evaluating investments based on a broad range of companies derived from information. Analysts will compare a company to its closest competitors on a variety of valuation metrics and subjective measures such as competitive position and expected margin trends. The analysts will then examine financial and non-financial factors influences on earnings to determine whether trends are sustainable and decide whether the stock is likely to exceed expectations going forward.

In addition, the analysts will examine gender diversity and equality through data metrics while evaluating company sustainability and diversity and inclusion reports. The team looks at the percentage of female leadership and representation in the workforce. Value is also placed on other factors, such as training programs, equal pay initiatives, transparency, and corporate policies around diversity. Risk factors in a company’s business, finances and governance are also analyzed to make sure that the risk reward trade-off is favourable. Once the stock is thoroughly researched and deemed attractive, the stock is assessed with the team, and if approved, it becomes a buy candidate for the portfolio.

Now how do we analyze companies through this strategy? Well, buy candidates need to demonstrate a commitment to gender diversity and positive human capital management practices. The team seeks to invest in companies who have above average metrics versus the economic sector. We also believe in buying and holding companies that are attractive in value. We assess value by considering not just pure, relative and absolute information, but also by analyzing valuation in the context of a company’s cash generating potential, ability to meet investor expectations, quality of balance sheet, competitive positioning, volatility of earnings, and vulnerability to critical ESG factors, such as poor governance. Investment ideas are generally sourced by using a firm’s internal stock ranking system that we discussed earlier in combination of screening for companies with attracting gender lines in human capital metrics.

So what’s an example of a stock that screens well? We talked a little bit about our process earlier. We often get the question as to what is the name that screens well that we like fundamentally. And I think General Motors is the name that makes sense here. We’ve owned it for about a year now in this strategy. Fundamentally, we like the valuation and we like the EV story, but on top of that, GM is actually the highest scoring U.S. name per equity on gender measures. The company stands out first, performance on fair compensation, publishing a gender pay gap of 3% or less at all levels of the company with a published strategy to close the gap. The company offers flexible work hours, flexible locations, and its board is over 50% female alongside a female CEO. And so it’s really combining the strong fundamentals in our view with a top tier gender score that’s what it takes to get a name into the portfolio.

Another name that we like in this strategy is Trane Technologies. Trane is a leader in the global climate industry and essentially a pure play in the HVAC business. In our view, the HVAC market should be a secular winner post Covid with a focus on indoor air quality and while a company is also focused on cost savings that should drive improved operating leverage. But also on the gender front, the company scores extraordinarily well with equity for women representing 42% of the board and 25% of employees globally. And this is one of the first companies to join the CEO Action for Diversity and Inclusion and the first company in our industry to enter the Paradigm for Parity coalition, a pledge to bring gender parity to the corporate leadership structure by 2030.

So again, another name that we like, has really good characteristics, but also really, really strong gender characteristics.