When it comes to business trends, most agree we are returning to an appreciation of the basics. You know: real value propositions, paying customers, and profits.
This week, no less a financial authority than Morgan Stanley, with 1,300 offices in 42 countries and 60,000 employees, released their latest take on what creates meaningful financial performance. It is a report about what makes a good investment--mostly unsurprising, with one huge new twist.
Gender diversity delivers better fundamentals?
In their detailed global analysis, the key takeaway is that gender diversity is a critical factor in evaluating good financial investments. Morgan Stanley presented its first model to rank global stocks on gender diversity in an internal conference earlier this week. Like all models, you can assume it evolves. In their own words, the key take-aways are:
1) Higher gender diversity companies have better fundamentals, slightly higher ROE, lower accruals, and lower volatility of ROE compared with relevant non- diverse peers.
2) Higher gender diversity companies have moderately outperformed non-diverse peers over the past five years.
3) The higher gender diversity stocks within the top quintile have delivered a better information ratio (i.e. have similar returns with lower volatility) than the overall top quintile
4) As a matter of fact, low gender diversity is associated with more drawdowns and more blowups.
Low gender diversity holds companies back
Credit for the political correctness, and the leading thinking behind this model, goes to Adam Parker, Chief US Equity Strategist, and the main portfolio manager behind an individual stock model that Morgan Stanley offers as a core strategy. His strategy is on trend with insights accompanying the venture capital downturn and the rise of women entrepreneurs nationally as an economic driver.
"Dr. Parker is very smart, but even better than that is his focus on substantiating conclusions with vast amounts of research and data," says Frank Vorndran, a financial advisor with Morgan Stanley in Washington, DC. "He and his team have the strong research and data to support the conclusions that gender diversity matters in investment performance. For those that don't know that it matters, this may convince them."
Investors look for return
In a time when many investors are fishing in over-crowded pools, Morgan Stanley is striking a strong note that the shape of future performance is curvy.
Consider the emerging trend that that 41% of entrepreneurs today are minorities or women in the United States. Plus, minority-founded or gender-diverse companies are correlated with stronger financial performance.
While correlation does not prove causality, insisting on scientific causality for financial performance puts up a false barrier to picking high performing companies. There are too many qualitative factors in any one company's trajectory, talent and leadership to control all the causal variables--so causality is a red herring no one's going to be able to prove.
However, thoughtful studies and models like this one from Morgan Stanley are interesting contributions to the frontier of informed investing. Their model strikes a realistic note in how to model performance and the quantifiable benefits of diversity in creating cash-conscious, capital efficient value. Now, it's up to us to put it to work in our financial and business decisions.