Women and cats make monkeys out of men
Investment executive Paul Gambles says female fund managers outperform their male counterparts by a long way, and stockpicking is not a reliable way to allocate funds
Investment funds managed by female managers tend to perform much better than those managed by men. Or at least they did last year, as well as in the five years before that. Last year alone, women managers achieved just under a 9-per cent return, almost three times better than men, who averaged less than 3 per cent. Despite this sustained success, investment research consultants Rothstein Kass can identify only around 100 female hedge fund managers globally.
There are notable female fund managers today such as Abby Joseph Cohen at Goldman Sachs and Fidelity’s Abby Johnson. Even back in the unenlightened 1990s Mercury Asset Management’s Carol Galley was regarded as “the most powerful woman in The City of London”. Bank analyst, Meredith Whitney, is largely credited with being among the first to foretell the sub-prime mortgage crisis of 2007-2008.
Among the portfolio managers regularly chosen by myself and my colleagues at MBMG Group, the senior team at Ruffer LLC is almost 25 per cent female whilst Edouard Carmignac has famously designated his daughter, Maxime, as his heir apparent. MitonOptimal have five of their main mandates managed or co-managed by Joanne Baynham, their Head of International Portfolio Management. Baynham was here in Bangkok recently, after a gap of several years – to dispense her own unique brand of feminine intuition to investors, to a women’s financial forum and at an intimate lunch, to raise funds for women’s charities.
Our own CEO at MBMG Group, Jan Sumanus, was herself the feature of a TV programme about the unusual situation of being a Thai lady in charge of such well-known foreign businessmen as Graham MacDonald, John Sim, John Cassella, Billy Popham and myself.
Meredith Jones of Rothstein Kass believes that women are much more capable managers of risk than their male counterparts. She also believes that, because smaller funds tend to outperform bigger counterparts, the exclusion of women from larger mandates gives them a statistical edge in terms of performance. Yet the evidence doesn’t support either of these explanations.
Even in the 21st century, opportunities are slim for women. That means only the very best women rise to the top whereas men with more mediocre capabilities are given client funds to manage. Maybe women are not innately better at managing money but perhaps the investment world gives opportunities to a far greater mediocrity of male investment managers that are denied to all except the very best women?
According to Rothstein Kass’ report, women are given few opportunities to manage funds. This means that they have little chance to develop track records. Therefore there are very few leading female fund managers. In turn this means that there is no incentive for companies to give opportunities to women to manage funds. And so on, ad infinitum, with women closed out of the old boys’ network.
But it is not just women who outperform their testosterone-charged male counterparts. The male-bastion trading floors may have been replaced by electronic trading, yet the world of equities is still largely dominated by the “old-boy” network.
The recently announced results of The Observer’s 2012 stockpicking challenge showed a more interesting result. A group of professional, male equity managers, a group of students and a ginger cat named Orlando were given the task of investing in five companies listed on the London exchange from the FTSE All-Share index at the beginning of 2012. Orlando selected his stocks by throwing his toy mouse at a grid of numbers that represented FTSE companies. Orlando generated a 10.84-per cent return, easily outperforming the professionals (who gained 3.52 per cent) and the students (who managed to lose money).
It may be that cats are superior to human managers of either gender but a more considered conclusion may be that the activity of stockpicking (which generates very little by way of outperformance) is not only a waste of time but is also totally random. Investors should focus their time and energy on the 90 per cent of returns that come from asset allocation (e.g. whether or not to own stocks at all) rather than asset selection (i.e. whether stock A is better than stock B).
Generating returns by asset allocation is a proven skill. Generating them by stock picking is, for almost all investors, a myth. The experiment with Orlando the cat, which echoes Burton Malkiel’s blindfolded monkey in his book, “A Random Walk Down Wall Street”, merely emphasises this.
The key take-out for me from Orlando’s story is that not only is stockpicking largely irrelevant, it’s also now practically impossible. The vital lesson from the Rothstein Kass story is that investors need to seek out the best portfolio managers, male or female, and ignore the mediocrity of the herd. Mediocrity in investment management may be a manly make preserve but excellence is limited to very few women and also very few men too.
Interestingly, Edouard Carmignac’s daughter, Maxime, will be absent on maternity leave this year, which will give her time to reflect on her father’s famous assertion that to manage money takes “balls and brains” – in view of Rothstein Kass’ data, this may be the most inappropriate instance of resorting to the language of the locker room!
Paul Gambles is managing partner and chief investment officer of MBMG Group. He features on CNBC’s “Squawk Box”, and Money Channel’s “News At Ten”. His regular MBMG updates can be found at www.mbmg-group.com/mbmg/blog and he can be contacted at [email protected].
