Certainly, diversification is key to asset allocation in portfolios in order to reduce uncompensated risk exposure. And it’s been well established by researchers that teams of individuals who have diverse backgrounds, education, and experiences tend to outperform teams that are more homogenous.

Yet among investment teams, women are significantly underrepresented considering that they account for roughly half of the population.

Recent Vanguard research finds that the investment industry may be missing out as a result of this underrepresentation. According to the study, U.S. active equity funds with gender-balanced investment teams tend to outperform those that have all-male or all-female teams.¹

“We started looking at this question because our experience suggested greater gender diversity on investment teams could lead to better fund performance,” said Stephen Lawrence, the study’s author. “But systematic research backing that up has been sparse.”

The study set out to explore what role the diversity of an investment team plays in terms of fund performance. One challenge in such research is that asset managers often report only selective diversity information, resulting in data gaps and systemic biases.

To address this challenge, we analyzed biographical data submitted by individual investment team members to eVestment, LLC, a third-party provider of fund information used for manager selection and screening purposes. More than 90% of investment professionals associated with actively managed funds provide a biography with details of their employment history, education, and other credentials.

Recognizing that all members of an investment team—not just a fund’s named portfolio managers—can likely impact performance results, we also looked at the biographies of other investment professionals involved in decision-making, such as research analysts, traders, and assistant portfolio managers.

To determine the gender mix, we used natural language processing (NLP), a form of machine learning applied to the analysis of text. This approach allowed us to comb team members’ biographies for their preferred pronouns rather than relying on first names, which would have been open to potential misidentification.²

The NLP algorithms also enabled us to look at other dimensions of diversity including education level, university (which in turn helped us identify individuals educated in other countries), professional designations, and subject matter expertise.

Our research looked at the investment teams of 2,669 U.S. active equity funds from 2008 through 2021. Of 33,600 individuals on those teams, only about 1 in 7 was a woman.³ That figure, though low, correlates with other recent research indicating that, among named portfolio managers, only about 1 of every 10 is a woman.⁴

More than half of all the investment teams in our analysis were all-male while only 2% were all-female. The remaining teams, about 41%, were mixed gender.

We took monthly snapshots of the characteristics of each fund team, then observed the fund’s subsequent 12-month returns, cross-referenced by gender diversity and other characteristics such as education and international experience.

Funds with gender-diverse teams tended to shine. Funds managed by single-gender teams underperformed their benchmarks by 12 basis points (bps) on average, while funds managed by mixed-gender teams outperformed their benchmarks by an average of 10 bps. (A basis point is one-hundredth of a percentage point.)

Performance was strongest for mixed-gender teams where at least half of the team were graduates of Ivy League institutions, which we used as a proxy for quality of education.

Through regression analysis, we calculated that investment teams that were 50% women and 50% men were associated with an average net increase of 23.5 bps in excess returns over all-male investment teams, after controlling for fund and investment characteristics.

Our regression analysis controlled for other factors including fund size, firm size, number of holdings, team size, and manager turnover. When we also considered other dimensions of diversity and education quality, the improvement in performance for funds with mixed-gender teams was even more pronounced, at 38.9 bps.

An investment team’s gender diversity has the potential to meaningfully affect fund performance. In essence, maximizing gender diversity may add to the team’s overall strengths.

“While we also see professional qualifications and diversity of education as strong indicators of fund outperformance, they alone cannot explain the unique benefit that gender diversity brings to a team,” Lawrence said.

“Our results encourage anyone involved in investment management to approach team diversity with the same rigor we do portfolio diversification, recognizing the meaningful impact both have on fund performance,” Lawrence added. “Gender diversity can be seen as an important added attribute of a well-qualified, well-trained, diversely experienced team of investment professionals.”

• Gender diversity and U.S. active equity fund performance