Are women better than men?

A recent report by consultants Rothstein Kass suggests that over the last five years, up to 31st December of last year, hedge and alternative funds run by female managers outperformed those run by men. In 2012 alone, women achieved returns almost 6% higher than men, with a return of just under 9%. Yet, the report states there are only around 100 female hedge or alternative fund managers globally. Also, women tend to run smaller mandates than men and are given less opportunity to take on more senior roles.

Nevertheless, there have been some notable women managing funds, such as: Abby Joseph Cohen at Goldman Sachs, Fidelity’s Abby Johnson, Carol Galley – formerly of Mercury Asset Management and regarded as ‘the most powerful woman in The City of London’ in the 1990s – and Nicola Horlick, founder and principal at Bramdean, which specializes in women clients. Additionally, Meredith Whitney is largely credited with producing outstanding research on sub-prime mortgage exposures which alerted her ex-colleague, John Paulson, bringing him spectacular gains and worldwide fame in the Global Financial Crisis.

Among the portfolio managers recommended by MBMG, Ruffer’s senior team is almost 25% women, while MitonOptimal’s Head of International Portfolio Management is Joanne Baynham, who manages or co-manages five of their main mandates. Added to that, Edouard Carmignac has named his daughter Maxime to one day lead his business.

Rothstein Kass’ report makes the point that the limited number of female investment managers is a self-fulfilling supply issue – there are few opportunities given to women to manage funds. Therefore, there are few opportunities for them to develop track records and make their names, resulting in the fact that there are very few leading women fund managers. Given this situation, there is no incentive to give opportunities to women to manage funds. And so on, ad infinitum.

Meredith Jones of Rothstein Kass believes that women managers outperform men because they are more capable managers of risk. She also suggests that women are often restricted, as mentioned above, to smaller mandates, which tend to outperform their larger equivalents; thus women are at a statistical advantage in fund performance.

I am not convinced by either of these theories. To me, it is perhaps just so much more difficult, even in the 21st century, for women fund managers to find opportunities that only the very best 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.

It is not only women who outperform their male counterparts, however. In The Observer’s 2012 stock-picking challenge, a ginger cat called Orlando also outperformed a group of professional male equity managers and some students in choosing the overall five best-performing companies from the FTSE All-Share index. He picked his stocks by throwing his toy mouse at a grid of numbers representing constituent FTSE companies and generated a 10.84% return, more than three times better than the professionals.

It could well be that cats make better managers than male or female humans. However, a more rational conclusion is that stock-picking is highly random, generating little Alpha or outperformance. Investors should instead concentrate on 90% of returns that come form asset allocation (i.e. whether or not to invest in stocks at all), rather than fund selection – choosing particular stocks to invest in.

Generating returns by asset allocation is a proven skill, whereas generating them by stock-picking is, in most cases, a myth. Thus, as recent data shows, an ever-increasing proportion of equity methods are made through passive strategies rather than active ones. At MBMG, we find that replicating a stock index through an Exchange Traded Fund (ETF) or Contract for Difference (CFD) allows us to focus on asset allocation, which drives 90% of differences between portfolios.

The key lesson from Orlando’s story is that not only is stock-picking largely irrelevant, it is also now practically impossible. The vital conclusion from the Rothstein Kass report 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 very few men, too.