The Boy’s Club: Discussing Gender Disparity in the Financial Industry

  • The efforts that the industry has made to include female representation are very visible, but they do not appear to be enough
  • The number of females in top positions have contracted over the past year and there is a persistent pay gap
  • Women are underrepresented as fund managers, despite equal performance
  • Thought leadership is the most important asset a company can invest in, and the value stems from having diverse perspectives

Over ten years ago in regards to the Great Financial Crisis, Christine Lagarde, the current managing director and Chairwoman of the International Monetary Fund said that “if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today“. Her reasoning was the following:

“Greater diversity always sharpens thinking, reducing the potential for groupthink… This very diversity also leads to more prudence, and less of the reckless decision-making that provoked the crisis.”

Gender equality has been a debate for decades, and the efforts are strong to increase female representation. Many of the processes that companies are enacting appear to be transparent and understandable, but there is still a lack of balance due to perceived gender disparity and the idea of a “boy’s club” perpetuating the system. There have been massive improvements over the years and visible effort from firms, but there is still low female representation in the C-suite, as fund managers, and the persistence of a pay gap, despite relatively equal skill sets and similar performance numbers.

Making Strides: The Increase in Female Labor Force Participation

The progress in increasing labor force participation among women has been substantial over the past several years. However, disparity still exists. The IMF released a study in of October 2018 that focused on the economic gains that come from gender inclusion. In 2014, female labor force participation (FLFP) was 54% among OECD countries, 49% in middle income countries, and 64% in low income countries. All of the statistics trailed behind that of the male labor force participation (MLFP).


Source: IMF

When focusing on the OECD level, there can be several reasons for this participation mismatch, ranging from family responsibilities to inherent bias. Focusing on reducing the gap between FLFP and MLFP, and continuing to bring females into the workforce will help with further enhancing the impact that diversity has on economic gains.


Source: IMF Blog

There are productivity and growth opportunities to be realized from diversity, with the IMF determining that there are significant output gains across all country types. The bottom half of countries could potentially see a 35% increase in GDP, simply by closing the gender gap. Most of the gains come from adding more workers, but 20% of the gains are a reflection of how productivity is influenced by gender diversity.

Talk vs. Act: Everyone Knows Gender Diversity is Important

Even as female labor force participation grows, female representation in the financial industry has been notoriously low, due to several variables, such as the glass ceiling and the stigma of a lack of work-life balance in the field. A lot of the bias is unconscious too, as there can be a trap of “this is how it’s always been“. The “boy’s club” reveals our human biases, as it is simply the practice of surrounding oneself with those who share similar characteristics. It is entirely within our nature to promote someone who is familiar to us, and if the industry is dominated by Caucasian males, it is human nature for them to hire more Caucasian males.

It might not be intended as malicious decision making, but it ends up creating a divide. In 2018, 24 women were at the head of Fortune 500 companies, a decline from 32 in 2017. This represents a 25% decline in representation year over year. There were several resignations that led to the decline, with the heads of Avon, HP and Campbell Soup Co, among others, stepping down.


Source: Statista

The number of women added to company boards have increased, which is promising. They now occupy 18% of board seats overall, up from 16% in 2017. Females might be on the boards, but only 4% of those boards are chaired by a woman. Females compose 16% of executive committees, and at this rate of growth, will compose 30% by 2048, taking 29 years to double. Only 23% of CFP® professionals, 18% of CFA charterholders, and 15.7% of financial advisors are women.

Education: Getting Females Into Finance

Female representation is on the rise, indubitably. But it always seems to be a see-saw, a balance, that can tip one way or the other. Universities are enrolling more females than males, so education is not the problem. Females earned 56.2% of all bachelors degrees in 2018, which is expected to remain relatively stable into 2022, and increase beyond then.


Source: AEI

According to data from Glassdoor, males are much more likely to major in Finance and Economics, at 61.5% and 65%, respectively. Obviously, that step puts them on the fast track towards a job in the financial industry. On that note, companies can only hire what exists, and if females have no interest in pursuing the field, companies cannot hire them.

Another problem is that once females enter the field, they leave it at a higher rate than they are being hired, and at a higher rate than men leave. As you can see in the graph below, most young females and males carry the same ambition when starting out, and have strong desire to reach a senior position in the organization and make sacrifices to do so. However, that gap between genders widens substantially as the two groups age, most notably between 40 and 50 years old.


Source: Oliver Wyman

That can lead to further problems down the road. These women often leave because the costs of continuing on the job tend to outweigh the potential benefits, according to interviews conducted by Oliver Wyman. It’s important to have female leaders at the top, because then young women can use them in a proxy in their own goal setting. As Marisa Drew of Credit Suisse said,

“When a young woman hits a hard point in her career, if she looks up and does not see any women at the top, she wonders if she will make it – if all of the sacrifices she will have to make will pay off. That is one key reason why women leave the industry

The Persistence of the Pay Gap

The Pay Gap. It comes up in every conversation about gender equality and for a good reason. It does still exist, even when adjusted for statistical controls, as shown in the graph below. In the United States, the unadjusted pay gap is 75.9 cents, and 94.6 cents when adjusted. The power of compounding can be seen here. The pay gap will cost millennial women more than $1 million in earnings over their lifetime. On average, in the financial industry, their compensation averages 21% less than a male who holds a comparable role.

The pay gap has all sorts of explanations, the most common one being that men are statistically more likely to take jobs that pay more. Women usually take time off to have children, which can sometimes disrupt their career track, and thus their earnings. Regardless, the largest pay gap in all of the industries is within the finance profession, according to the US Census Bureau.


Source: Glassdoor Research

Stagnant Numbers: The Story of Female Fund Managers

According to Morningstar data, only 2% of funds are managed by a woman or team of women. 76% of funds are run exclusively by men. Over the last 15 years, the 2% female representation has remained exactly the same. Meredith Jones, author of Women of the Street, created a Jim/Bob Ratio, finding that for every 11 fund managers with the names “John, James, William, or Robert” there was one female fund manager.

Compared to other professional fields, this is a huge knowledge gap. Women make up more than one-third of all medical doctors, one-fifth of law-firm and accounting partners, and one-quarter of federal judges. For comparison, females represent one-fiftieth of all fund managers.

fem rep

Source: Yahoo Finance

The entire fund management industry has increased almost 4.5x in size from 1990 numbers, going from 1,900 managers to 8,500. Male fund manager numbers have actually contracted over time, dropping 3.5% from 2015 to 2017, whereas female fund manager numbers have remained stable. However, females often have a more difficult time getting capital and getting in front of investors, which stunts their fund’s growth, according to Dr. Nicole Boyson of Northeastern University.


Source: Yahoo Finance

Numbers Mismatch: It’s Not Because of Performance

Women deliver returns just as high as men do. They tend to go into emerging market funds, ESG investments, and other non-traditional portfolios. 31.3% of EM fund managers are female. Men outperform females in equity funds, but female managers deliver higher returns within fixed income portfolios, as shown in the graphs below.


Source: Yahoo Finance

The HFRI Women Index, which measures exclusively female hedge fund manager performance, has significantly outperformed the HFRI Fund of Funds Composite on a year over year basis. It did trail behind the HFRI Composite Index, which measures the hedge fund market as a wider universe, but outperformed it over a ten year time frame. This supports the numerous studies that discuss how diversity can positively effect hedge fund performance.


Source: Cambridge Associates

From a psychological perspective, women are thought to be more risk-averse. That can compound in gains during times of volatile markets, and can deliver more stable returns over time. One study found that men traded 45% more than women, with the churn reducing their net returns by 2.7%. Also, banks with women board members were shown to carry “higher capital buffers, a lower proportion of nonperforming loans, and greater resistance to stress“.

There are caveats to each of these points, as there is varying evidence that women are more risk averse, with some studies finding women are riskier investors. But the big idea is that positive returns and financial stability do stem from greater diversity in thought leadership.

The Ultimate Alpha Engine: Delivering Returns Through Diversity

The financial industry is changing. As new tech and new regulations come into play, it becomes more and more important for companies to have a broad based exposure to all sorts of thinking styles. A female will think differently than a male, and both have the necessary skillset to find the answers to problems, but one or the other might solve the problem more efficiently.

When everyone thinks the same, they make the same mistakes. CTI Research found that firms that embrace diversity have a higher market share and are more accurate in their pricing analyses. Errors were less correlated, and the diverse group itself operated more efficiently.

With that being said, most financial companies are trying their best to achieve gender balance. But awareness is only half of the issue, as real and well-directed change has to be enacted to have any benefit. Diversity has to be pursued, not as an opportunity to check off a box, but as an actual business performance incentive. But of course, changing institutional culture is not easy.

Men should also be able to take advantage of any initiatives that arise, such as parental leave and flexible work options. This will allow for an easier process of industry acceptance and normalization of such opportunities. Gender equality means equality for men, too.

It’s also important to include racial and ethnic diversity, in addition to gender parity. Customers want to see themselves represented by the firm. They want to know that the people they are working with have an understanding of the challenges and hurdles that they might face in their day to day life. Also, thinking styles vary across different groups, and in order to generate the most alpha from thought leadership, it is important to have strong representation of several different groups. As the nation grows more diverse, company composition should change to reflect that as well.

As Susan Skerritt of Deutsche Bank said. “We need diversity of thought – gender diversity is only one part of this”. It’s about creating a place where ideas that hold merit are valued and considered with equal weight. Thinking and innovation are what drives success in an industry and a nation, and it is incredibly important that all voices are heard when moving forward.

There are several investable opportunities within this dialogue too. State Street Global Advisors has a Gender Diversity ETF (SHE) that tracks companies that have high proportions of women in leadership positions. It carries an expense ratio of 0.20% and trades on decent volume. It has returned 3.83% over the past month, 4.80% year to date and has a $1.70 dividend.

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.

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