‘SHE’: Gender Diversity and Smart Beta Meet
In March, State Street Global Advisors’ SPDR SSGA Gender Diversity Index ETF (SHE) took home five awards from the annual ETF.com Awards, more than any fund before. The fund was one of the most important launches of 2016, bursting out of the gate with a heavy seeding from teacher pension fund CalSTRS, which helped develop the fund. Lynn Blake is an executive vice president at State Street and the CIO of global equity beta solutions, where she is also the fund’s lead portfolio manager. Here, she discusses the investment argument underlying the fund and how it came into being.
ETF.com: Would you talk about the investment argument for gender diversity that drives SHE?
Lynn Blake: It really is based on the volumes of research that have been done by so many organizations, like McKinsey and Catalyst and the Clayman Institute and Credit Suisse and MSCI. I can go on.
All of the evidence shows that greater gender diversity leads to more thought and perspectives, which leads to better decision-making. And those better decisions ultimately translate to stronger corporate performance, profitability and—ultimately—price.
That's really the investment thesis. That's the business case around gender diversity for portfolio companies, as well as organizations more broadly.
Some of that research has been focused at the corporate board level, but also much of it—including the research done by the Clayman Institute—extended to senior leadership levels. And it was really diversity at senior leadership levels that had the greatest correlation to stronger performance.
ETF.com: Is part of the appeal of the fund based on the way it melds a socially responsible mission with a smart beta approach?
Blake: Absolutely. The goal of the SHE ETF and the Gender Diversity Index is twofold. It certainly is to address the social issue of the gender gap in corporate America, to ultimately try to change the composition of corporate America by identifying companies that really have been able to attract and retain a diverse workforce.
But then, as important an objective as the social issue is the investment thesis behind that social issue. And that's where we really have looked at the research and done our own research that has corroborated all of those other firms that have looked at gender diversity and the impact on performance.
ETF.com: As shareholders, will the management of SHE be taking an activist role to advocate for gender diversity on the boards of the companies that are held by the fund?
Blake: There are two ways I can answer. Certainly, the idea of the SHE ETF and the Gender Diversity Index is for companies to really view it as their benchmark and aspire to be—to the extent that they aren't currently included in it—included. Right now only about 190 companies out of the largest 1,000 companies that are traded in the U.S. are included and meet our diversity standards.
The goal is to ultimately go from 200 to 1000 or more, and to have all publicly traded U.S. companies have strong diversity at all levels across the organization. So that's one goal of the Gender Diversity Index.
Separately, as an organization, SSGA owns about 10,000 companies worldwide across all of our portfolios. And in 2017, we've made a deliberate call to the boards of those companies to increase their diversity specifically. We've issued this call-to-action specifically within the U.S. market, the U.K. market and the Australian market where there still is not enough gender diversity, even in large-cap companies.
As an example, when we looked at the Russell 3000, 25% of those 3000 companies still have zero women on their board of directors. We don't think that's acceptable. When we think about the most critical aspect of corporate governance and long-term, sustainable results for our portfolio companies, a big part is having a strong, effective and independent board.
Having a strong, effective, independent board means they have to have diversity—all kinds of diversity—from work experience, to education, to unique skills, but absolutely gender diversity as well.
We’ve issued a call-to-action to these companies that have no women currently on their board to talk to us about what their game plan is—over the short term and the long term—to increase gender diversity.
ETF.com: How has CalSTRS been involved?
Blake: CalSTRS absolutely inspired the Gender Diversity Index. They are as impassioned about gender diversity as SSGA is. We've partnered with them on initiatives to increase gender diversity within asset management.
As an example, for the second year in a row, we co-sponsored an event called Beyond Talk, which is specifically a workshop we've put together with them to take action to achieve gender balance in the financial world.
We knew that gender diversity is an initiative they're very interested in, as we are. But when we look at the real numbers, it hasn't really translated to progress as quickly as we would’ve liked it to.
We started brainstorming, asking what the other ways are that we can highlight the benefits of gender diversity. Trough those discussions, we said, “How about actually putting capital to work”—putting your money where your mouth is, so to speak.
Through those discussions, we had the idea of creating a smart-beta ESG [environmental, social, governance] strategy that identified companies that have strong gender diversity, and then to own those companies in a strategy, and then ultimately in an ETF.
ETF.com: Will the requirements for SHE's underlying index evolve as the market that it focuses on evolves? As more and more women join senior management and boards and take on CEO roles, will the requirements for SHE continue to remain static? Or will its methodology evolve?
Blake: Absolutely. As I said, hopefully, there will ultimately be very little difference between the Gender Diversity Index and the broad market. But currently, when we look at gender diversity levels—especially within certain sectors—there are certain sectors that have very little gender diversity, like tech and energy.
To maintain some element of sector neutrality, we didn't want to include a lot of companies in a sector like utilities and significantly underweight a sector like energy because of the gender diversity factor.
We wanted to neutralize sector exposure as much as possible. And to do that, it means we could only include about 10% of the market cap within each sector without really sacrificing the gender diversity of the factor.
Ultimately, to the extent that a sector like energy increases their gender diversity, then we could increase that 10% cutoff to 20% or 30%. And ultimately it won't even be necessary. That's definitely the goal—that the Gender Diversity Index won't be necessary because companies are achieving diversity levels at all levels of their organization.
ETF.com: What sectors have a better handle on gender diversity based on the data?
Blake: Based on the data, consumer staples, consumer discretionary, utilities and health care have stronger gender diversity. And sectors that have less gender diversity include energy, tech/IT, as I mentioned, and materials. Those are the sectors where we've seen the biggest variance.
ETF.com: Beyond CalSTRS, what’s been the response when you're pitching this fund?
Blake: A lot. Certainly, we've had great conversations. To some degree, the conversations start with an educational element. This strategy departs from the market's allocation of capital. We designed it so it could be a replacement for a core U.S. large-cap index, but it has less than 200 stocks. And it has some sector differences relative to the broad market.
There's an educational element to the conversations. We talk about what the investment thesis is and the fact that this is a long-term investment. It's based on the belief that gender diversity in the long term drives sustainable results and better outcomes for our clients. So that's a conversation we're having with all types of investors.
We've had intermediaries put it on their platform. We've had some third-party investors. We've had good daily volume. Our expectation is that this is a long-term investment, and the conversation to increase assets and volume is also a long-term play.
ETF.com: The SPDR S&P 500 ETF Trust (SPY) has outperformed SHE since SHE’s launch, and so has the iShares Russell 1000 ETF (IWB). What kind of environment do you think would give this fund the chance to outperform?
Blake: All ESG strategies are prone to cyclical market forces. And we can see periods of underperformance and periods of outperformance. But it's absolutely a long-term strategy and a long-term investment.
The market environment that we're currently seeing—especially after the November election—is very much risk-on and high beta, and lower-quality firms have tended to do quite well. The Gender Diversity Index has a bit of a quality bias in it. Companies that have more women at the top of the house have been shown to have higher-quality balance sheets and higher profitability levels.
We define those two features as [return on equity] and net profit margin. As a result, the current market environment is actually not great for those kinds of attributes—low leverage, high profitability and high quality.
It also has somewhat of a health care overweight, which was not been a great-performing sector in 2016 and this year as well, despite the fact that the fundamentals are very strong in terms of earnings and revenue growth. There are some clear market sentiment short-term issues that are driving health care performance.
It's been a bit of a tougher environment for the ETF recently than in the historical data that we looked at. It speaks to the need to really have this as a long-term strategy.
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