Want better returns? Buy women-led companies

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An increasing number of companies want to put more women into management and executive positions, and while that’s good for diversity, it’s a boon for investors, too.

According to a study by Finland’s Nordea Bank AB, between 2009 and 2016, publicly listed companies that had women as CEO or head of the board, had a 25 per cent annualized return, compared to 11 per cent for the MSCI World Index. A Credit Suisse survey found that since 2005, businesses with more than one woman on their board of directors have a compound annual growth rate of 3.7 per cent over those with no women on their board.

Anita Anand, a professor of law at the University of Toronto and the J.R. Kimber Chair in Investor Protection and Corporate Governance, has been a staunch advocate for gender-diverse boards of directors and female C-suite representation for years, so these findings are no surprise to her. “When a woman succeeds, our entire society succeeds,” she says. “That’s what the research is showing.”

Other studies, such as research from Fidelity Investments, has elicited similar results. The company looked at a decade’s worth of performance data from the top 1,000 U.S. firms. Businesses that had above-average female representation at the senior management level, and had gender diversity initiatives and policies in place, outperformed the market by on average 1 per cent each year over the last 10 years.

This outperformance is not solely the result of hiring female CEOs, says Nicole Connolly, a portfolio manager and head of ESG investing with Fidelity Investments. Many of these firms also have family-friendly policies and mentorship programs in place, which are key to attracting and retaining women employees. Women appreciate flexibility since they still shoulder much of the at-home responsibilities.

“It’s not enough to just have the female leader in the C-suite,” explains Ms. Connolly. “You need a culture of diversity and inclusion to really advance women in the organization.”

Companies with more women employees, and those that truly understand their employees’ needs, tend to have more productive staff and, therefore, achieve better results, according to a 2015 study in the Journal of Organizational Behaviour. Women-led teams are also more collaborative, communicate better and are more open to learning.

As a result, diverse companies tend to make smarter decisions around their growth, capital allocation and balance sheet strategies. “That’s why we see these female-forward gender diverse companies outperform over time,” she says.

Investing in women

Naturally, buying companies that outperform the market is good for a portfolio. That’s why Fidelity launched its Women’s Leadership Fund in June. While not every company in this core U.S. equity strategy is led by a woman, every business in the fund prioritizes women’s leadership and development.

Ms. Connolly looks at 20 different criteria when deciding what to invest in, including parental leave policy,if the company has strong leadership programs for women, and if they monitor the hiring, promoting and retention of women. “The fund is exposed to women across all sectors and that's one reason it can play a central part in someone's equity exposure because it is diversified,” she says. “And I think the universe is only going to grow."

While some investors might question the merits of this type of strategy, once people know that these companies outperform, investors will start asking why they haven’t been invested in women-focused companies before, notes Ms. Connolly.

"I think as people begin to understand that you don't have to sacrifice performance to invest with impact, the conversation goes from 'Why would you invest in a women's leadership fund?' to 'Why wouldn't you invest that way? Why wouldn’t you invest in a way where you could achieve competitive returns while having a positive impact on society? '” she says.

While companies still have more work to do when it comes to putting women in leadership positions – only 5 per cent of Russell 3000 companies have a woman CEO – many businesses are recognizing the need to become more diverse.

So too are advisors whose clients want to own shares in more gender diverse companies. With a greater number of women set to receive inheritances, and with more earning a good living, women are expected to control close to half of all accumulated financial wealth by 2026, according to the Investor Economics Household Balance Sheet Report. They’ll be looking to buy firms that reflect their values, says Ms. Connolly.

Despite these trends, it will still be a while before C-suites and boards reach gender parity, notes Ms. Anand. “We need to keep encouraging women to take on leadership roles,” she says. “It takes decades to dismantle these norms.”

Progress may speed up, though, if women-focused companies continue to outperform. “We need to ensure we discuss the value of women in the C-suite,” she explains. “Shareholders are taking notice.”

Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.