No Tradeoff Between Diversity and Performance

November 28, 2022

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56 studies, 50 years of data, and a clear consensus: There is no trade-off between diversity and investment performance.

That’s the capsule summary of the second edition of Diversity and Investment: A Summary of the Research. “More specifically,” says author Theresa Hamacher, president of Versanture Consulting, “there’s strong evidence that women investors, firms owned by women, and teams that include women and minorities generate investment results that are at least as good as those generated by other investors.”

The revised research review, which was just released by the Investment Adviser Association, is a significant expansion on the 2021 original. The second edition adds 11 studies, bringing the total number of studies summarized to 56, and incorporates updates to 3 recurring studies.

These 56 studies were published over a period of 25 years, and, combined, they examine 50 years of data for a wide range of investment types, including mutual funds, private funds (meaning hedge funds, private equity, or venture capital), and personal accounts. All examine how diversity affects investment returns, risk, or portfolio construction by studying actual investment results or portfolio positioning.

What has changed from the first edition? The newest studies are more likely to address how the diversity of investment teams affects performance, risk, and portfolio construction. By contrast, older studies were more likely to consider the gender, race, or ethnicity of an individual portfolio manager. Given this increased focus in the literature, the revised review explicitly discusses conclusions on team performance.

What hasn’t changed: The studies continue to be focused on gender, rather than other measures of diversity. “That’s because of data constraints,” noted author Hamacher. “Researchers can make reasonable assumptions about gender based on first names and pronoun use, but they can’t use a similar approach when it comes to other types of diversity.”

As a result, only 20% of the studies examine other types of diversity, specifically minority status, ethnicity, culture, or socioeconomic background – and roughly half of these studies examine these factors in conjunction with gender. However, “the findings of the studies addressing these other types of diversity are consistent with the findings of these studies focused on gender,” noted Hamacher.

Overall, the conclusions of the literature review remained essentially unchanged from the first edition. In brief:

Performance: There are 26 findings that diversity is associated with outperformance, 15 findings of no difference in performance, and 7 findings that diversity is associated with underperformance.

Interestingly, the studies from academic authors focused on mutual funds tend to find no difference in performance, while the studies focused on private funds – which are often from industry authors – are more likely to find that diversity leads to outperformance.

“While the mutual fund studies are normally considered the strongest because of the reliability of the data, the large number of studies finding a correlation between diversity and outperformance need to be factored in,” explained Hamacher.

Risk: More than half of the studies address the issue of risk. To summarize, there are 17 findings that diversity is associated with lower risk or outperformance in down markets, 4 findings that diversity is associated with higher risk, and 12 findings in the middle (no difference or mixed).

The findings on risk in personal accounts are quite consistent, with two-thirds of the studies finding that women take less risk in some or all circumstances and no studies finding that women take more risk. (All of these studies look at gender only.) The studies also find that women trade less in their personal accounts than men.

However, some authors have questioned whether gender is the primary driver of the findings. Differences in risk tolerance or financial knowledge (which may be related to gender) could be the critical factor. (Note that the studies already adjust for income and marital status, which have a strong influence in the propensity to take risk.) One cross-border study supports this argument with its finding that gender differences in risk-taking disappear in countries with higher levels of gender equality.

“Unfortunately, it has become accepted wisdom that women take less risk, because that’s what the oldest studies found,” suggests Hamacher. But that’s changing, she argues: “The newer studies looking at professional investors are more mixed.”

What should investors take away from this body of research? “It’s clear that diversity and investment performance co-exist,” concludes Hamacher. “Investors don’t have to make a choice.”

“Diversity and Investment Performance: A Summary of the Research (Second Edition),” is available to download as part of the diversity, equity, and inclusion resources available on the IAA website.