Undiversified, by Ellen Carr and Katrina Dudley (prologue)

UNDIVERSIFIED THE BIG GENDER SHORT IN INVESTMENT MANAGEMENT ELLEN CARR AND KATRINA DUDLEY

Prologue

When you think of someone who manages money, do you think of a man or a woman?

If you answered “woman,” you’re unusual. You are not necessarily wrong, but the odds aren’t in your favor. The headline statistics—the genesis of this book—speak for themselves: only 10 percent of portfolio managers (PMs—the people managing and investing your money) are women, and investment management (IM)1 firms majority-owned by women manage less than 1 percent of global investable assets.2 Your authors are, in this respect, the 10 percent and 1 percent, respectively. We manage money in the equity and fixed-income asset classes at a large mutual fund manager and a small, majority-womenowned institutional manager. We love our jobs. We consider ourselves blessed to work in the investing industry—and to do so largely unscathed by the blatant sexism that gets a lot of coverage in other industries.

When we saw the statistics quoted above, we weren’t exactly shocked—but it got us thinking. Why don’t we work with more women? What is it about IM that has resulted in a gender imbalance that rivals that of Silicon Valley, television comedy, and other broculture arenas? Why is there only one of us for every nine men in the

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room when we attend industry conferences? We’ve both been in this industry for more than twenty years—and seen little change in the gender of our peers over these two decades.

As we began talking informally to peers in the industry, as well as some who have left, we came to five conclusions about IM’s diversity problem. Our growing sense of puzzlement about the questions they raised led us to write this book.

1. Finance itself has a diversity problem, but it’s not nearly as severe as that of IMs. GAO (Government Accounting Office) data shows that women make up a third to half of employees in financial services broadly. They are much better represented in banks and insurance companies, for example, than in IM. Why does our sliver of the finance infrastructure exclude women?

2. Diversification is Investing 101—yet we don’t do it in our personnel ranks. Why does an industry that insists on adequate diversification for its clients have a blind spot where its practitioners are concerned?

3. Active investment management has failed to generate returns in excess of the market, after accounting for the fees charged to clients. The clients for whom we manage money have woken up to this and are shifting into low-fee, passive strategies that seek to match a benchmark rather than make active bets on individual holdings. Isn’t it at least possible that the industry’s failure to meet clients’ expectations results from its homogeneous workforce? This is your (and our) retirement money and college savings we’re talking about! Don’t we owe it to ourselves and our clients to figure out why we’re not generating the results we promised, and ask tough questions about the role our homogeneity might play in this failure?

4. No book about IM would be complete without a discussion of the rise of passives. We believe that this represents an opportunity for women, as competing for assets requires differentiation,

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and diversity is a pillar of that. For all the disruption passives have caused, active IM still dominates the industry (and we are both beneficiaries of its tenacity); the battle for assets is still active management’s to lose.

5. Money is power. Whether you lament or embrace this statement, you probably agree with it. Investment management is at the epicenter of our money and your money. Our industry pays us quite well—which means that as long as only 10 percent of us are women, the industry is contributing disproportionately to the wage gap that permeates corporate America. Why do men get to take home the lion’s share of IM profits and hold the power that comes from wielding a big checkbook? And our industry is in charge of allocating your capital, which means making decisions about which companies and business models deserve your investment. Why is your money, and the power that goes along with investing it, in mostly male hands?

We hope that we don’t have to prove this point in 2021, but we will make it nonetheless: increasing gender diversity is not a “feel good” issue in IM—it is imperative. Gender diversity isn’t merely equitable or fair—it makes good business sense. Active IM is particularly ripe for a revolution in its personnel ranks. It is under siege from passive IM on the one hand and technological innovation on the other. As IM firms struggle to adapt to these twin threats, we are writing this book to ask, why shouldn’t gender parity be part of the solution to our industry’s woes?

With these questions ringing in your ears, you will read about the dearth of female PMs in three sections in this book: 1. Definition: an overview of the IM industry and the career path and role of the portfolio manager, ending with a deep dive into statistics on female representation at money management firms.

The intent of this section, which we anticipate some industry

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participants will skip, is to provide an understanding of the IM industry and investing careers that are available, as well as an overview of the industry’s gender demographics.

2. Diagnosis: an investigation of the reasons for the male dominance of IM, drawing on the two authors’ collective four decades in the industry, analysis of the undergraduate and MBA “supply chain” into investment management, interviews with successful women investors as well as those who left the industry, and the authors’ own stories.

3. Solutions, from three perspectives: (a) how to address the industry’s image problem at the earliest stage of recruiting (college/ MBA); (b) how to keep, support, and promote women once they opt into the career; and (c) how various organizations and people are striving to change the industry’s gender composition.

Our “Money Manifesto,” the last chapter, is a challenge to the industry to ensure that women are no longer the salient minority at IM firms but, rather, are broadly and fairly represented in this lucrative, fulfilling career.

We will say this early and often: let’s not blame men for IM’s gender imbalance. Instead, let’s see what we can do differently to encourage more women to pursue IM careers. By all means, let’s celebrate the women who have made it to the top of the IM game, who are running IM firms, beating the market and hanging out their own shingles against the odds—while acknowledging that their career paths and, in many cases, their very personalities are unusual.

A Word on Terminology If you’re new to the world of IM, we will be using some terms that might be unfamiliar in this context, or that might be slightly different from the words you associate with investing. We’ll do our best to define these as we go; for now, here are two that we use throughout the book. xii

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1. Investment management (IM). Here’s the Investopedia definition: Investment management refers to the handling of financial assets and other investments. The term most often refers to managing the holdings within an investment portfolio, and the trading of them to achieve a specific investment objective.

Investment management is also known as money management, portfolio management, or wealth management. Investment management is also known as fund management, asset management, money management, or simply investing. Throughout the book we will use these terms interchangeably.

2. Portfolio manager (PM). Here’s the Investopedia definition: A portfolio manager is an individual who develops and implements investment strategies for individuals or institutional investors. The PM role is our primary focus in this book, as PMs are responsible for the day-to-day management of your money. Confusingly, many people in IM are called PMs, including wealth managers, financial advisors, and institutional or client PMs. Our book is about the people who focus on the analytical side of investing rather than those who focus on selling investment solutions to individual and institutional investors.

We’ve kept the industry jargon because we think your mastery of it will give you a leg up as you’re interviewing—whether that means interviewing for a job or interviewing someone to become your financial advisor. In case it becomes overwhelming, at the end of this book we’ve included a glossary with the terms you’re likely to encounterhere and in our industry.

Gender Diversity Versus Other Types of Diversity This book focuses on the topic of gender diversity specifically. We hope that someone will write a book about other, equally troubling diversity gaps in IM. We have heard from non-Caucasian men that xiii

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the issues women face in the industry ring true for them as well, so we believe that some of our takeaways will prove useful to male minorities.

Where Is My Female Warren Buffett?

There is no female Warren Buffett—a North Star women can aspire to emulate. The CFA Institute, the industry’s primary professional network, found in diversity and inclusion workshops that 71 percent of the participants listed talent acquisition as one of the top three reasons for diversity/inclusion—that is, casting a wider net helps find great talent.3 Yet talent acquisition is impaired by the lack of role models: Why would you want to go to work in an industry in which no one looks like you or has the life you want to have? We heard this echoed in our interviews across generations, from senior PMs to undergraduates considering the career: Women are intimidated because there are no role models.

If the only stories that you know are of people who aren’t anything like you, don’t have any experience like you, don’t look anything like you, don’t remind you of anything about yourself . . . then you kind of think, is this really for me?

I’ve never had a female mentor.

Females look to other female “heroes,” but they don’t see other females in this job.

If anything, thanks to survivor bias, the women who make it to the top of the industry are sometimes overwhelmingly impressive. As one of our interviewees said, “While there’s room for lots of different

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male personality types in our industry, I’ve observed that really only one female personality type works well in IM, and it’s so high-achieving that it can be intimidating as a role model.”

In interviewing dozens of successful women for our book, we did consider identifying—inaugurating—one to be the North Star for women aspiring to careers in IM. Believe us when we say that there are plenty of great candidates. But we ultimately decided that a constellation made up of different models of success—that is, “stars”—rather than a singular North Star is a more meaningful construct. Why? For one thing, exposure in our industry is of dubious value. With the exception of a few high-profile investors who sometimes come across as obnoxious, rich old white men—we won’t name names here, but you know who they are—our industry is pretty anonymous, because managing big piles of money requires a dose of paranoia. If you work at one of the world’s biggest fund managers, you don’t want too much coverage of your investment strategies for fear that others will copy them. And let’s not forget that Warren Buffett had the luxury of starting as a relatively unknown investor in a relatively unknown area of the country. There were no smartphones—and no immediate exposure or feedback when you made a big call or trade. Today there is nowhere to hide, and successful women in IM are already under intense pressure because they are a rare breed. The additional pressure of having to represent the industry’s token woman, competing with the aforementioned high-profile men, offers limited upside, with plenty of downside potential. Call this a poor risk–reward investment.

And we don’t want to discourage you by relating the incredible success stories of some of our interviewees; instead, we encourage you to keep the concept of survivor bias close at hand when you benchmark yourself against some of these women. When you read our constellation chapter, we hope you’ll hear the message that we heard repeatedly: IM professionals (including us!) love their jobs—the continual learning, intellectual stimulation, and constantly changing investment landscape. We hope that reading about these women will inspire you

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to enter or continue in the field of investment management, knowing that there are lots of women—including, especially, us!—who have your back.

Let’s do away with the prototypical money manager image we used to open this prologue. And let’s get rid of the Ginger Rogers expectations that many of us have felt working alongside mostly men while we’re at it. Many of us feel that we’ve had to dance in heels, backwards, to have successful IM careers.

Let’s kick off our heels—it’s time to move.

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Karim Olaechea

HOWARD MARKS , cofounder and cochairman, Oaktree Capital Management

“Even the best investment management firms are struggling to fill more than 20 percent of their investment roles with women. This book provides a clear diagnosis of the problem and actionable solutions—written by portfolio managers, not outsiders. This book is a valuable resource for women in investment management, those considering the profession, and investment firms seeking to both attract and retain more women.”

JENNY JOHNSON , president and CEO, Franklin Templeton

“Despite the continuing dearth of female asset managers, I still hear people proclaim that the pipeline isn’t the problem. Carr and Dudley’s book highlights surveys of undergraduate and MBA-level women that give critical insight into the ongoing struggle to build a robust female investment management talent pipeline and, more importantly, offers suggestions on how to help.”

MEREDITH A. JONES , author of Women of The Street: Why Female Money Managers

Generate Higher Returns (And How You Can Too) Dagmara Szulce Photography

KATRINA DUDLEY is a global equity portfolio manager at Franklin Templeton Investments, one of the world’s largest asset managers. She is the author of the introduction to the Vault Career Guide to Mutual Funds (2016). She is a frequent market commentator on CNBC and Bloomberg, a mentor to up-and-coming female investment professionals, and a guest lecturer at Columbia Business School.

Cover design: Lisa Hamm

“This book is the best I’ve read on the troubling issue of gender diversity in the investment world. In my forty-year career, I’ve worked with many women who are extraordinarily gifted. Why aren’t there more of them? This book powerfully addresses and answers the question. A must-read for investment professionals or anyone interested in career fairness.”

JIM WARE , CFA, author of six investment books, founder of the Focus Consulting Group

“In this timely, specific, and actionable book, two successful practitioners demystify investment management. They show why it is an excellent career for women—and why the industry needs women to survive and thrive.”

UNDIVERSIFIED

ELLEN CARR has over two decades of experience as a high-yield bond portfolio manager, most recently at Barksdale Investment Management, a majority-women-owned, institutional fixed-income investment management firm. She is also an adjunct professor of finance at Columbia Business School, where she teaches courses on the credit markets and cash flow modeling. She is an occasional contributor to the Financial Times.

“Today, all forms of inequality are being scrutinized. The underrepresentation of women in investment management isn’t in the headlines, but it’s something many of us in the profession want to change. How can we make progress in this regard? Undiversified by Ellen Carr and Katrina Dudley is the authoritative source on the subject and a great place to start.”

CARR AND DUDLEY

PRAISE FOR UNDIVERSIFIED

DIVERSIFICATION IS A CORE PRINCIPLE OF

UNDIVERSIFIED THE BIG GENDER SHORT IN INVESTMENT MANAGEMENT

TOM ANDERSON , founder and CEO of Anasova and author of four books including

New York Times and USA Today best-seller The Value of Debt $24.95

ISBN: 978-0-231-19588-1

ELLEN CARR AND KATRINA DUDLEY

The Heilbrunn Center for Graham and Dodd Investing Printed in the U.S.A.

investing. Yet money managers have not applied it to their own ranks. Only around 10 percent of portfolio managers—the people most directly responsible for investing your money—are female, and the numbers are even worse at the ownership level. What are the causes of this underrepresentation, and what are its consequences—including for firms’ and clients’ bottom lines?

In Undiversified, experienced practitioners Ellen Carr and Katrina Dudley examine the lack of women in investment management and propose solutions to improve the imbalance. They explore the barriers that subtly but effectively discourage women from entering and staying in the industry at each point in the pipeline. At the entry level, the lack of visible role models discourages students from considering the field, and those who do embark on an investment management career face many obstacles to retention and promotion. Carr and Dudley highlight the importance of informal knowledge about how to navigate career tracks, without which women are left at a disadvantage in an industry that lionizes confidence. They showcase a diverse constellation of successful female portfolio managers to demystify the profession.

Drawing on wide-ranging research, interviews with prospective, current, and former industry practitioners, and the authors’ own experiences, Undiversified makes a compelling case that increasing the number of women could help transform active investment management at a time when it is under threat from passive strategies and technological innovation.