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Why Investing in Women Pays Off

Speaking on the theme of governance, Jennifer So outlines the benefits of investing in companies that are committed to gender, and consequently, intellectual diversity.

March 2021

Photo of Jennifer So

Jennifer So

Associate Portfolio Manager,
Senior Associate Fundamental Canadian Equities

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Key Takeaways

  • Fund outperformed the benchmark by 4.15% in 20201
  • Strong belief in gender diversity as a competitive advantage
  • Willing to collaborate and improve corporate best practices

We know gender diversity in the C-Suite often results in higher profitability and value creation. Can you explain why?

JS: Well, there are many diversity benefits that drive positive financial performance. New ideas come from different places, different points of view, and you need a wide range of perspectives to enhance decision-making in an increasingly complex global marketplace. Also, many studies show that the ability to draw on a wide range of viewpoints, backgrounds, skills and experience is critical to a company’s success – especially when it mirrors the composition of their customers. [Go deeper: Research from Harvard Business School finds that gender diversity raises the collective intelligence of a group, improving performance far more than traditional factors, such as cohesion, motivation and individual intelligence.2 Read More > ]

Some investors may have misperceptions about your mandate, so can you clarify your process? For example, do you invest exclusively in companies with female CEOs?

JS: Our process has evolved over time. First and foremost, we decided every company must either have a certain percentage (>25%) of women on the board OR a female in the C-Suite. Then, a couple years ago, we sat back and thought deeper about how to meaningfully advance gender diversity, a process which has been frustratingly slow. We decided to place greater emphasis and scrutiny on the pipeline of talent at all levels of the corporate hierarchy, because nobody wakes up one day and suddenly becomes CEO. Many years of hard work lie behind that promotion, so we’ve identified three core areas to address, including barriers to advancement, rates of upward mobility and closing of the gender pay gap.

Another important part of our process is fundamental analysis; we require every holding in the portfolio to cross a high bar, in addition to the gender lens criteria outlined above. These are encapsulated in our five investment pillars of Moat, Growth, Leadership, ESG and Business Value.

Can you explain how “invest and improve” works in practice, for both the Women in Leadership and Sustainable Opportunities Canadian Equity funds, which you also manage? An example would be great.

JS: Our overarching Responsible Investment (RI) philosophy has only three words: Avoid, Invest, Improve. “Avoid” is self explanatory – there are areas of the investment landscape in which we see no alignment, such as tobacco or weapons manufacturing. For Women in Leadership, “Invest” is where we look for companies that have a genuine commitment in increasing diversity. And for the Sustainable Opportunities Canadian Equity Fund, it’s where we invest in firms whose products and services are helping solve a sustainability challenge in the world. We believe these companies will better manage their workforce, appeal to customers, benefit from structural tailwinds and create shareholder value in the long term.

The last, and my favorite, is “Improve.” We work with companies to find areas where they can do better, because no organization is perfect and there’s always room for growth. For instance, Waste Connections is a long-standing holding in our strategies. It’s a great example of a company that’s both improving diversity and providing basic sustainable infrastructure. We engaged with their senior leadership at length, including several meetings with the Board of Directors, CEO and CFO. Ultimately, based on those conversations, they increased the percentage of women on their Board and established diversity targets for the Board’s compositions. They met our requirements, and we added them to the portfolio as a result.

Let’s talk allocation. Last quarter the Fund was overweight IT and Industrials, and underweight Energy and Communication Services. How are those positions doing?

JS: First, allow me to say we run concentrated portfolios that are benchmark agonistic. We don't care about the target sector allocations, because we are very focused on the long term and asking ourselves the key questions, such as: “What can this company look like in 3, 5 or even 10 years?” A true commitment to the long-term is one of the last inefficiencies left in the market, given that many investors consistently underappreciate how much a high-quality company can grow and compound returns over time. Case in point: the strategy outperformed its benchmark by 4.15% in 2020.1

To answer your question, we are overweight Technology and Industrials because some of the best businesses are found there – think recurring revenue, large moats, capital-light structures, high incremental reinvestment opportunities. These are the types of business we think can create significant value over the long term.

Jennifer, one last question. We like to end by asking for book recommendations that have shaped the way you think. What would you suggest for our Advisor audience?

JS: I'll give you two of my favourites. First, The Outsiders by Will Thorndike, which is a “radically rationale” blueprint for value creation. The book highlights eight unconventional CEOs at companies like Berkshire Hathaway and Capital Cities, all of whom generated incredible returns over the long term by staying laser focused on a CEO's most important job: capital allocation.

The second book is Mindset by Carol Dweck. I started reading the book as a parent, but it really can and should be applied to every aspect of life. The thesis is simple: People with a fixed mindset are less likely to flourish than people with a growth mindset. They believe their abilities are static, as in “I was born athletic, or I was born smart,” whereas people with a growth mindset are more likely to believe their abilities can be developed. They think “If I practise baseball, I'll become a better athlete; or if I study, I'll get a better mark,” and that mentality enables them to succeed. This is a book that can change your life, as its ideas have changed mine.

In addition to the BMO Women in Leadership Fund, which is available in F-Series (fee-based) and Front-End, Jennifer So also manages the BMO Sustainable Opportunities Canadian Equity Fund, a key exposure in our responsible investing (RI) lineup. Both funds allow investors to align personal values with their investments, and positively contribute to broader societal issues, all with the bench strength and expertise required to excel.

1 Series F performance in 2020. Performance for the period ending January 31, 2021: 1 year: 6.92%; 3 year: 9.04%; since inception: 10.11%. The fund is measured against a mix of 60% S&P/TSX Composite Total Return Index and 40% S&P 500 Index.

2 Anita Woolley and Thomas W. Malone, “Defend Your Research: What Makes a Team Smarter? More Women,” Harvard Business Review, June 2011.

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