Men versus Women; The Impact of Gender on Differences in Investment Style and Results

By Erik L. van Dijk

In our last two blog posts we analyzed how private investors take their decisions. With our without the help of financial planners, the non-professionals seem to struggle in the financial market place. Before concentrating ourselves on the institutional side of the industry in later blog entries, we would like to ask the question: but what about gender? When looking at the TV, or reading a newspaper, it seems clear that the financial world is (still?) mainly male-dominated. This is especially true when it comes to the main executive and ‘content’-related positions in the industry. In marketing and sales things are slightly different, for obvious reasons: when the industry is male-dominated, and not just that, but even dominated by alpha males that exert some macho characteristics, then don’t be surprised that it pays off to overweight the percentage of good-looking, eloquent, nicely-dressed and -heeled women in your marketing/sales staff.

But is this gender pattern in line with investment qualities? During the last 10-15 years there has been quite a bit of behavioral research into this question. And now, with the group of Wall Street, London or elsewhere-based crooks (be they big bankers or frauds) that have or should apologize for the Credit Crisis being male-only, it is interesting to summarize the results. A remarkable, but clear pattern evolves:

i) Gender and Investment Confidence

It will not come as a big surprise that all research seems to indicate that one important difference between the sexes is that men tend to believe that they understand investments, whereas women have less difficulty explaining that they are not so sure about their abilities. And in and of itself this lower ego is not a wrong thing: investment analysis and portfolio management is a complicated thing. A far larger number of disasters were the result from overconfidence than from lack of confidence. The result of this difference in confidence is first and foremost that less women trust themselves to start investing (as amateur) or even consider a career in investments. But what remains to be seen is if the confidence differential translates into quality differences between those men and women that start to invest.

ii) From confidence differential to style differential: women care more about the details

The lower confidence levels in women translate into an approach in which women want to know far more about their potential investment than men. Men ‘think’ that they understand things much quicker than women do. Result: women will dig deeper when it comes to the information-gathering phase before deciding if they buy/sell an investment.

iii) Women: the careful investors. From less confidence and more detail to lower-risk strategies

And even when studying a larger information set, women don’t get rid of their initial negative confidence level gap. They remain prudent and translate knowing more into a larger interest in investments in asset classes with lower risk. I.e. fixed income securities, real estate et cetera. Men like to go for higher beta (more systematic risk) and higher volatility securities. This implies that – if we will find a return differential between men and women in favor of portfolios created by men – we will have to make sure that portfolio returns are corrected for differences in risk, before making our final judgment.

iv) How the lower ego of women translates into a larger willingness to incorporate mutual funds in

the portfolio

When your personal SWOT indicates – after careful revision of the available data – that you don’t know enough, then it is far better to outsource the decision to a professional with proven track record than to gamble. Women do therefore use a larger percentage mutual funds than men do. Sometimes up to 40 percent larger allocations to mutual funds. This does translate into a larger diversification of women portfolios and it adds to the risk differential between female and male portfolios, even when looking within a specific asset class.

v) Style drift: women are more style consistent

One of the problems with investing is that you will go through periods of success and lesser periods. When doing so, investors will also be exposed to external information from news media, so-called experts et cetera indicating where the real profits were. This will create an innate tendency to shift your style bets away from the original plans into new territory that might seem to generate better results. Men are far more sensitive to this style drift than women are. To some extent this is caused by the fact that women in general won’t embark so quickly on a new path. They are less afraid to miss out on that so-called ‘unique opportunity’. They have a longer-term investment approach and understand that a new chance will always follow.

vi) Men are better for their brokers: excess trading

The overconfidence of men and the eagerness to follow the quick buck leads them into strategies that involve a larger amount of trading. Studies seem to indicate that the average annual turnover of male portfolios is some 25-50 percent higher than that of female portfolios. This larger trading activity in male portfolios is the result of overconfidence (‘I understand the market and feel that this is the right time for a timing-related switch!’) and to another extend to the shorter-term focus of men. It will obviously lead to higher trading costs, that will eat away part of the gross return on the male portfolio. Note that the male portfolio should – based on what we found so far – outperform the female portfolio on a gross basis, because of the excess risk taken. If you have a larger tilt towards higher risk instruments, you should earn a higher gross return. And net return as well, unless the trading wasn’t smart in the first place. Interestingly, some studies seem to indicate that this was indeed the case: the net results of the male and female portfolios would have been higher had they refrained from intra-year trading and concentrate on an annual buy-and-hold strategy instead!

vii) The Return Analysis, who wins: men or women?

One of the most important studies analyzing the return differential on female and male portfolios was the 2001 Barber & Odean paper Boys will be boys: Gender, Overconfidence and Common Stock Investment as published in the Quarterly Journal of Economics. Barber and Odean were also (together with Heath) writers of the paper that we used in yesterday’s blog on ‘Good Reasons’ investing. It is quite likely that women – fed by a larger information base with more details – use more complicated decision models that are to a lesser extent prone to the ‘good reasons’ fallacy. And indeed, studying the investment behavior of more than 35,000 households over the 1991-1997 period the authors conclude that single women score portfolio returns on a risk-adjusted basis that exceed those of single men by 3.0% annually. In marriage couples that decided to have men and women invest separately the differnence is still there, but to a lesser extent: in that case the women outperform by 1.4%. And this is not a pure US result. A 2005 study in the UK corroborated these findings. Actually, UK blokes are relatively lousier investors than their US counterparts were, or, UK women were better than US ones, or a combination of both. But more research is needed, since the Barber-Odean study was more rigorous and robust than the UK one.

Another study by Kuenzi and Riessen (University of Cologne, Germany, 2006) came to the conclusion that the differential net return did not exist when looking at mutual funds that were either led by a woman investor as leading portfolio manager or a man. In other words: the overconfidence of men leads to disasters when it is not based on some kind of background knowledge. Male amateurs seem to forget that they are just that: amateurs. But when taking a closer look at the Kuenzi-Riessen paper the result is still surprising. First, we should not forget that there are far more mutual funds led by men than there are by women, and the funds that men manage are much bigger too. As if there was an innate tendency in the professional community to mistrust women that didn’t want to focus on selling and looking good, but on fund returns instead. Now, Kuenzi and Riessen show that on a gross basis male mutual funds do indeed outperform. However, the outperformance was to a large extent directly related to the fact that they take more risks. So part of the excess return was eaten away after a proper risk-adjustment. There was still a bit of outperformance left though, but that gross outperformance was consecutively eaten away by excess trading. Final result therefore: equal net returns, but the women got there with excellent style consistency. Knowing that style consistency is in and of itself also important in asset management (because you should always assume that you are not running the whole portfolio of the client, so that if you don’t stick to your job his/her overall portfolio risk-return profile might start to be hurt), the conclusion should again be that – if anything – women win.

viii) Give women more space and investment responsibilities

So women should feel a bit more confident about their investment qualities (as long as they don’t become overconfident!), and the men that dominate the investment community or their married amateur counterparts that still believe that they are best-equipped to do the finances at home should give women more credit for their hidden investment qualities and give them more space.

In a slightly different setting, Harvard professor Boris Groysberg corroborates these findings. In the August 2008 Harvard Business Review he gives a nice interview to reporter Martha Lagace, explaining that based on his research ‘star’ women (be they financial analysts, lawyers, investment managers, accountants, investment bankers et cetera) are more successful than men when changing their job. The ‘star’ women that are hired by a new employer who wants to pay more or offer other fringe benefits for the new divas are far less disappointed than employers who hire male ‘stars’ from another company. Groysberg explains that there are two reasons for this:

a) Portable Relationships

Women are good in having both internal and external relationships and this phenomenon is part of the same process that made them look for more details when it comes to taking investment decisions (see above). Never wrong to know more (be it about things or be it people). Result: they can easily adjust to new circumstances, with their external network helping them cope with it. Men on the other hand are more inward-looking (either alone or with their smaller group of buddies), and do therefore struggle when switching to a new, unknown situation.

b) Smarter Evaluation

Women use ‘multi-factor’ approaches in which they probably are not totally aware of the exact weights of factors in that decision process (they are not necessarily more quantitative than men, on the contrary!), but they know damn well that it is wrong in complicated situations to use an oversimplified decision procedure. In other words: they are less senstive to Barber, Heath and Odean’s ‘Good Reason’s Fallacy’ that we explained in yesterday’s entry. This implies that women take better decisions about when to switch jobs and to what employer to go.

ix) It was a man’s world. Will James Brown’s song become past tense in the credit crisis and the years ahead of us?

I think that it is impossible to believe that the gender divide will continue in its current form. Especially so after the credit crisis in which the male species played such a dominating role. Coming from a family of strong women, where men were never inclined to think that they were the dominant species and blessed with a sister that is indeed a savvy, smart investor who – based on qualitative reasoning – was always capable of challenging my ‘quant’-based work and making sure that I didn’t forget to incorporate qualitative factors in our decision processes at Lodewijk Meijer, I don’t find this shocking. However, I cannot exclude the rise of some kind of countermovement that wants to maintain the existing glass ceiling that is hindering upwardly mobile women in society in general and in investing in particular.

On a global scale the sign of times is that women will  become more important in our industry and based on what we just mentioned, that is a good thing.  Last month, the Financial Times published a nice article about female Japanese investors. Contrary to what many Western outsiders might think, women in this Asian country do already play a far stronger role when it comes to managing the household budget and savings than their western counterparts do. Actually, Kyoto professor Noriko Hama believes that Japanese women have played a significant role in recent arbitrage trends in the fixed income and currency markets. During the last 10 years interest rates in Japan were almost zero, a situation similar to the one the Western nations are now facing due to the credit crisis. In the Japanese case it was directly related to the multi-year Japanese recession. Now, with interest rates so low, the women were afraid that they could not balance their household budgets. Different investments were needed. Knowing that interest rates in favorite countries (for holiday and shopping) like Australia, the UK, Singapore or even Turkey were much higher than in Japan they steered money out of Japan into those countries. Of course, the Yen is normally a stronger currency, but with international investments almost being non-existent the combined acts of Japanese women (and men) led to a money outflow that created a self-fulfilling prophecy. It generated downward pressure on the value of the Yen, which in fact made this strategy less risky. The strategies were solely coupon/interest rate driven, without too much worries about the principal and with this positive surprise and – in the end – always the possibility to ask for payout in the foreign country where it can then be spend on a nice holiday or some shopping, it is already a clear indication that women are here to stay in investing. Be it in the Western world or in Asia.

Best of both worlds; smart gender diversification within the investment team

It is surprising to see that this plea for more women in investing is NOT the same as saying that women dominate men to such an extent that we should get rid of the overconfident, alpha-male investors alltogether. Research does also indicate that the best solution is a mixed team with both men and women. Men are good in the high risk zones of the market that require alertness, speedy trading and strong nerves. Women are better in the low-risk zones of the portfolio and when acting combined one group can be a useful control set for the other. It is in the end all in the mix!



2 Responses to “Men versus Women; The Impact of Gender on Differences in Investment Style and Results”

  1. […] on Investments and Markets Just another weblog « Men versus Women; The Impact of Gender on Differences in Investment Style and Results Word from the author (belonging to the entry below about Fund Manager Selection by […]

  2. […] especially in emerging markets, but it is also directly related to what we already indicated in our blog entry on investment styles. Basically, the cost-benefit analysis that is at stake when commiting fraud or corruption is an […]

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