Investment Funds based on Diversity Criteria

Many studies prove that well-managed D&I leads to better performance. Why not use these insights to design investment strategies? A few funds already do so and they were just joined by another one, the Solactive Global Gender Diversity Index, in partnership with UBS.

Already back in 1990, the Domini 400 Social Index was created as a base for an ethical investment strategies. However, analysis of the rating criteria revealed that the majority actually reflected good D&I practices. Over many years, the index outperformed its benchmark, the S&P 500, and other indices were created within the ESG (Environmental, Social and Governance) context. A study of 29 of these indices showed their performance was equal or better than the respective benchmarks. The report also mentions a slightly higher risk, due to a more narrow industry focus and the inclusion of smaller, more volatile stocks. Typically, ethical or sustainable indices exclude securities of companies involved in Nuclear Power, Tobacco, Alcohol, Gambling, Military Weapons, Civilian Firearms, GMOs or Adult Entertainment. Additions are made from lists of eligible companies based on considerations of ESG performance, sector alignment and size representation.

The latest venture: Solactive Global Gender Diversity Index

The new Gender Diversity index builds upon these experiences, mitigates some challenges and provides a focus on the political priority of our days. For it enables investors to integrate a gender-focused perspective in their investment strategies by choosing companies from a global stock universe that exhibit boardroom gender diversity and low volatility. Since its launch in November 2017, it has climbed some 7 percent – although such short-term figures do not allow any conclusion whatsoever. The Solactive Global Gender Diversity Index is licensed to UBS which offers three certificates in EUR, USD and CHF respectively.

Diversity Funds offer a variety of strategies

In some respect, the new Solactive Index is similar to other Gender Diversity indices like, for example, State Street’s SSGA Gender Diversity Index, which has been designed to track the performance of U.S. large capitalization companies that are leaders within their respective industry sectors in advancing women through gender diversity on their boards of directors and in senior leadership positions.

Other indices are based on LGBTI criteria, such as the Credit Suisse LGBT Equality Price Return Index, which has achieved a + 31.89 percent performance over the past three years. More information can be found at http://en.diversitymine.eu/investing-in-gay-friendly-companies-the-credit-suisse-equality-index/

Over this period, the Pax Ellevate Global Women’s Index Fund was volatile but did not climb. It has to be added that the Fund was merged with Global Women’s Equality Fund (launched in 1993) in June 2014.

Bloomberg follows a more specialized approach with its Bloomberg Financial Services Gender-Equality Index. It was launched in 2016, comprising 26 firms and doubled in 2017 to now include 52 financial services firms building gender-equal workplaces. However, it appears that this index is not used to offer certificates or investment funds.

This happens in many places, even on a regional level. In Lower Saxony, Germany, for example, the Hannover Stock Exchange created a gender diversity index which is used by the Ampega GenderPlus Investment Fund. It invests in 50 companies selected from Germany’s 300 largest firms (by market capitalization).

Robust Performance of Gender Diversity

This is a promising strategy. UBS has found that companies with women in at least 20% of leadership positions show superior profitability across various metrics (Alexander Stiehler, 2016, Gender Diversity Matters, UBS) – very much in line with many other analysis before. Calculating backwards, over the past six years, the Solactive Global Gender Diversity Index outperformed the MSCI World Index with an annual return of 8.9 percent versus 7.8 percent. Nevertheless, Steffen Kapraun, Structured Products Expert at UBS, put a certain emphasis on social and sustainable aspects, when he said on the occasion of the product launch: „Investors to whom gender diversity is important can add this part of the socially responsible investment universe to their portfolios with our index certificates. Just as for other fields of sustainable investing, there is convincing evidence that investing in accordance with societal values does not necessarily harm returns.“

The Solactive Global Gender Diversity Index is calculated as a Net Total Return and composed of 50 equally-weighted companies, which are readjusted quarterly. Gender diversity data is provided by Sustainalytics, which also means a pre-selection of eligible companies based on ESG criteria.

The top 20 securities, by market capitalization, currently included are Alphabet, Bank of Nova Scotia, CLP Holdings, Commonwealth Bank of Australia, GlaxoSmithKline, IBM, Johnson & Johnson, Lockheed Martin, Nestle, Novartis, Oracle, Orkla ASA, Pfizer, Procter & Gamble, Royal Bank of Canada, Toronto-Dominion Bank, Unilever, United Parcel Service, US Bancorp and Walt Disney.

UBS is currently not included due the volatility of the stock price over the past 12 months.