Investing in mutual funds has been a popular choice among investors, especially in the US market, where the first modern mutual fund was created. According to the Chair of the Securities and Exchange Committee (SEC), Mary Jo White, 46% of all U.S. households invest in approximately 10,000 mutual funds, which manage more than $63 billion assets. There is a large variety of factors that affect the decision of which fund is worth investing in, such as the fund’s objective or its fees. Is gender discrimination one of these factors?
The impact of gender on mutual fund management has not yet been researched extensively by academia. However, current literature demonstrates that funds managed by females attract fewer money inflows than male-managed funds. Therefore, female managers have fewer assets to manage. This can be seen as a sign of gender prejudice, as Alexandra Niessen-Ruenzi and Stefan Ruenzi prove in their experiment; people with higher prejudice scores invest less in female-managed funds. Their findings make a lot of sense as society often stereotypes investing as a masculine task.
My goal is to examine-whether investors should take the gender of the fund manager into consideration whenever they decide to invest in mutual funds. In this investigation I will focus on open-end actively managed equity mutual funds because they are more demanding in terms of skills and competence compared to index funds, in which managers are required to adopt more passive strategies (i.e. track the performance of a particular benchmark). I will employ data from the CRSP mutual fund database in which the percentage of female portfolio managers lies consistently between 9% and 10% which underlines the superiority of men in the field.
Differences in performance among the two genders
The following graph shows how the returns of the fund managers evolve over time. Male portfolio managers produce relatively better returns than the female ones, however, both struggle beating the market.
The former scores 9.87% while the latter achieves 9.42%. The market return on the other hand is 10.15% and thus outperforms institutional investors – a rather well-known phenomenon among investors. On top of that, while estimating the risk adjusted position of the fund managers I discovered that men performed better throughout the 20 year period. This finding seems to go against previous findings, especially if we account for the fact that females express a greater level of risk aversion. Therefore, I expect higher excess return per unit of risk. On the other hand, male fund managers show a Sharpe ratio (SR) of 0.18, whereas the females show one of 0.17.
Men also beat women in the information ratio (IR), which reveals the ability of the manager to consistently produce excess return over the market. They both score negative IRs – males score -0.05 and females score -0.08 - which is in line with the fact that the market generally beats mutual funds. Even though male and female money managers can’t achieve higher returns than the market, the former does so less consistently.
Finally, I will employ the CAPM model to detect if there is any sign of outperformance according to the Jensen’s Alpha measure. Again, in line with the findings above, both male and female managers do not outperform the market. However, men underperform less; -0.93% vs. -1.79%.
Should we avoid investing in funds with a female portfolio manager?
The conclusion that one may draw after reading this article is that male-managed funds seem better when compared to female-managed funds. The differences are relatively small and they could be explained by the fact that fund managers follow each other (i.e. herding behavior). To be specific, females are often more risk averse and less overconfident than men. Such differences may explain the performance gap between the two genders.
Does this mean that mutual funds managed by women should be avoided altogether? The answer, of course, is no. When I created subsamples according to the fund’s investment style I traced the outperformance of the female-managed funds against the male-managed ones in regard to the growth and income funds. These kind of funds require that their managers regulate their portfolios by showing a moderate risk appetite, a style that attracts the so called “balanced” investor. This investment style seems to fit the relatively higher level of risk aversion of the females and in this way they will outperform the male managers as they have a higher alpha. In contrast, growth and value funds, which offer above-average risk, achieve much better performances under the management of a man. Thus, if you are not looking for (relatively) risky mutual funds, but instead decide to spend your money on a more ‘’balanced’’ investment, I would recommend to consider a female-managed fund.
Although future research needs to be conducted on this subject, for now, gender performance seems to differ w.r.t. the investment thesis of the fund.
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Currently, he is expecting to finish his Master degree with cum laude distinction.