Undiversified: The Big Gender Short in Investment Management

Stephen Dover: As investment managers, a basic premise of what we do is diversified portfolios, but when it comes in our industry to diversifying, at least in terms of gender, we haven't done a very good job. About 10% of portfolio managers are female, and the numbers are even worse at the ownership level. Katrina Dudley has recently written a book called Undiversified: The Big Gender Short in Investment Management, and really explores all the issues about why we have such a gender gap in our industry. Katrina welcome.

Katrina Dudley:  Thank you for having me.

Stephen Dover:  Katrina, you have a statistic in the book that male undergraduates are 58% more likely than women to consider a career in investment management and 50% more likely to consider a career in financial services. So, talk a little bit about why you think women aren't better represented in investment careers.

Katrina Dudley: It's a topic that's been near and dear to my heart for many, many years as a portfolio manager at Franklin. One of the things is that we surveyed undergraduates across a broad range of universities in the United States. And as you said, we found out that women didn't know about investment management, and one of those big barriers was that not knowing about it meant that they didn't apply for jobs. The second thing is that we also found—and this is very encouraging—is that when they had exposure to a senior female, be it a guest lecturer, someone that they met at a cocktail party, or even their next-door neighbor, they increased their likelihood of applying and moving into the finance field. And so, we think that that’s another good thing. Finally, as we spoke to undergraduates, there's something about finance where we get a gold medal that we just can't be proud of. And that is, we are one of the most least-liked industries. And we found that women want to go to work at companies where they feel like they’re liked, and they’re adding value, and finance just doesn’t yet have that good reputation. As we say, “Houston, we've got an image problem.”

Stephen Dover:  That's really interesting and your conclusion that we really need to help women understand the industry better, but also provide mentors to them. But you have a list of barriers to advancement for women in the industry which I think you've distilled down into seven different areas. Can you talk a little bit about those barriers to advancement for women in the industry?

Katrina Dudley: Yes. I think there are a number of barriers to the promotion of women. So, we talk about the fact that we don’t recruit them in, but even when we recruit them, we need to retain them, and we need to promote them, so that we get those women at the top of the field. But let's talk about things, such as my favorite, which is the stay-at-home wife syndrome. We all complain about people who bring their work home. We found in investment management, that people bring their home to work. And what does that mean? It means that they take their home life construct, and they look at women who are actually working to say, “My wife is a stay-at-home mom. Why aren't you?” And we need to debunk that. We also need to address the promotion delay. We know that women are promoted at a much slower rate than men, and that therefore, if you promote people at a slower rate, if you pay them less, and also, if you evaluate a man and a woman, the woman gets evaluated at a lower rate, what happens is the NPV--we’re analysts, so we like to talk about net present values—but the NPV of a female career, or the worth, is lower. So, there's a lot of things there that we need to do as an industry addressing various things.

Stephen Dover:  One of the points of your book that I just…I have to smile at and I just… I find so interesting is that to be really successful in this industry, you have to have a higher-than-average level of confidence, or maybe even a big ego. You need that because it's tough to beat the market and you're going to be wrong sometimes. So how does that fit into this inequality equation?

Katrina Dudley: There is a well-known and well-documented confidence deficit with women. And if you think about it, what can we do as portfolio managers to help overcome that? So, think about it: I go into a room as a portfolio manager, and there are a number of analysts that are pitching a stock. And you think about the men…they'll use a lot of gendered language, so like, “This is a 10-bagger. Let's swing for the fences.” Women tend to be less confident. They don't use those types of analogies. The other thing too is that women will also represent the risks of the investment as well as the upside. So, it's actually a much more balanced perspective. So, if you combine the fact that women are giving you both sides of the story, not just one, with the fact that they also don't have that same confidence, and that confidence shines through to many PMs [portfolio managers] that they're not confident in their idea, you combine that together, and as an analyst, for us to be successful, you need to successfully pitch ideas of the money-making kind and get them into a portfolio. And, if that competence deficit means the names are not getting into the portfolio, you're not going to move forward in your career.

Stephen Dover:  It's interesting Katrina, as you say that, I stepped back a little bit and realize there must be a real issue with men just needing to be more aware of ways that they are putting women in uncomfortable situations that they're not even really aware of.

Katrina Dudley:  One of the interesting facts we learned when we wrote the book is that if you give unconscious bias training to men, it has the unintended effect of actually giving them permission to continue with those unconscious biases. So, if we talk about the languaging and things, and I talk about those 10-baggers, I don't think we want to teach men, “Don't say those things,” because a lot of is just built in. Making people aware, maybe they'll use them less. But what we think is being a portfolio manager aware of the fact that the men use those words and the women don’t, and trying to make that discounting at the PM level. So, I think that that's what we need to do. We don't need to change our language. We need to become more aware of it. The second thing in our book, we’re very, very clear—we don't blame the men for this issue. We very much analyze the situation, and we want to move forward. And the second thing is men are our allies. They're not our enemies.

Stephen Dover: You do in the book talk about a cycle, a list of solutions. Can you just kind of go a little bit through that list of solutions that you see for the industry?

Katrina Dudley:  So, we actually finished the book with our money manifesto, which is a challenge to each of what we call, “the four pillars of the industry,” that can make a change. The first is we challenged the investment-management firms themselves. We talked to investment-management firms that are very good at data analytics, and they need to turn that lens inward. We talk about equalizing the “Ps”: pay, performance, and promotion. We also talk about the people in investment management. You can become some mentors and sponsors to women and take that role very seriously. Then, we talk about the influencers. There are people at colleges, college professors should expand their Rolodexes and have more female professors or guest speakers in their classes and that will also help the problem. The final part of that solution is actually the allocators, and they have a role to play in terms of with investors that have diversity, either at the portfolio level, at the analyst level, or preferably at both.

Stephen Dover:  In your research for Undiversified, what surprised you the most?

Katrina Dudley: One of the things that surprised me the most actually came out after the book came out. When we started studying this, we looked at asset management as a meritocracy. I mean, you get evaluated. I know every day whether or not I beat the benchmark or I didn't. And so, what happened is that because it's a meritocracy, this is really the baseline for understanding the barriers to increasing gender representation in our industry. But interestingly, because we've studied this meritocracy, a lot of our conclusions apply outside of the four walls of the firm. They actually apply to other industries that have over-representation of men or have what we call, “the bro culture.” So that was surprising to me is that the book doesn't just help women in investment management—it’s helping women in finance, it's also helping men in finance, and it's also helping people outside our industry.

Stephen Dover: That’s wonderful to see such a broad application of the concepts in your book which I take the book to be just very pragmatic and very helpful to read. We all know that in our industry that passive investing has grown a lot, and you offer a pretty fascinating view on the rise of passives. If I may quote your book, “This is an opportunity for women as competing for assets requires differentiation, and diversity is a pillar of that.” What opportunities do you see going forward in passive investing or women being more involved in particularly active investing?

Katrina Dudley:  In our book, we look at the fact that asset managers have not diversified their ranks. Yet, as we talk about, Portfolio Management 101 is all about diversification and we know that a number of active managers have not delivered returns that exceed the benchmark. And so, we think that maybe part of the reason is that the lack of diversity in their decision-making process. So, they don't have all the access to the benefits of diversity. We know that when you add diversity to a team, it's greater innovation, better decision-making, so that is the first thing. And we think that's part of our ability to maybe beat the benchmark is from having more diversity and making better decisions as investment managers, which is what our clients want us to do. That is the reason we think we can fight back with adding diversity to the teams. The other thing that we all need to be aware is something we've found in the research is that women need to be approximately 30% plus of a team because when you actually add a female to a homogeneous team, originally the performance of the team will go down, and that is the communication costs and the cost of integrating that diverse person. But once women or any type of actual minority group gets to be what we call, “the heard majority,” so that their voices are heard in the room, that you really start to see the benefits of that. So as an industry, it's almost a race to the 30%. The quicker you can get your teams, investment teams, and your portfolio management teams over that 30% hurdle, you're going to be ahead of the competition because you've suffered the costs of diversity and now you're going to get the benefits of it.

Stephen Dover:  Katrina, thank you so much for such a clarion voice on the benefits of better gender diversity in the investment-management field, and as you mentioned, even beyond that. I found the book interesting: Undiversified: The Big Short in Investment Management. I recommend it. Thank you, Katrina, Senior Vice President, Investment Strategist for Franklin Mutual Series, for talking with me today.

Katrina Dudley: Stephen, it’s been a delight. As we say, “Now's the time to diversify.”

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