Gender Equality Funds Struggle to Outperform Market Benchmarks

Gender equality-themed investment funds, which aim to back companies committed to gender diversity and balance, have faced significant performance challenges in recent years. Though these funds were initially marketed as a way to align financial returns with social values, data suggests they have consistently underperformed against conventional benchmarks. According to a study by Morningstar, only a small fraction of these funds have managed to outperform comparable indices in any given time frame, with less than 10% succeeding over three years and only marginally higher figures over five years. This trend has led to growing scepticism among investors, with fund closures now outpacing new launches.

The struggles of these funds have been attributed to several factors. One key issue is the voluntary nature of corporate data reporting, which casts doubt on the quality and comprehensiveness of metrics used to evaluate gender equality. Additionally, the fund strategies are often constrained by geography and sector-specific elements, which can have a significant impact on investment outcomes. Kenneth Lamont, a researcher at Morningstar, highlights that many funds rely on metrics such as the percentage of women in leadership roles, equal pay initiatives, and flexibility in workplace policies, yet these criteria may not correlate directly with company profitability or investment success. These complexities make it difficult to construct indices or strategies that reliably deliver better returns.

Some investors have argued that pursuing gender equality investing is not inherently about outperforming the market but more about driving positive social change by backing organisations with progressive policies. However, even this goal is fraught with challenges. For instance, boosting the number of women in leadership may not necessarily translate to better-managed companies or higher profits. Similarly, there is growing recognition that a narrow focus on leadership diversity fails to account for more holistic factors such as company culture, pay equity, and supply chain standards.

One notable example is the UBS ETF Global Gender Equality fund, launched in 2017 and heralded for its potential to outperform based on gender-diverse company metrics. Despite initial optimism, it has significantly underperformed against the MSCI World Index since inception. In the words of some experts, the gap between the promise and reality of such funds underscores the potentially steep costs associated with using gender metrics as an investment lens.

Broader debates have also emerged about whether declines in gender-focused investing tie into ongoing cultural debates, including perceived backlash against “woke” investing. However, analysts such as Cinthia Murphy suggest economic and sector-wide factors, including the dominance of a few technology stocks over recent market returns, are likely of greater significance. Funds that mimic broader index compositions often show better performance, but this raises questions about whether they are genuinely adding value through their gender focus or simply benefiting from alignment with general market trends.

Fees remain another sticking point for investors. Gender equality funds, like many specialised or thematic investments, often charge higher expenses compared to standard index funds. This leads to further doubts about the value proposition for those seeking both financial returns and social impact.

Ultimately, while gender-focused investing carries the promise of promoting equity and perhaps encouraging companies to adopt fairer practices, its financial underperformance challenges the idea that it is a straightforward path to above-average returns. Some experts suggest that investors may achieve a higher impact by opting for low-cost index funds and redirecting the savings towards socially targeted initiatives, such as women’s charities, rather than relying on complex and often unclear metrics embedded in these funds. Despite this, efforts are ongoing among industry leaders to refine these investment strategies and develop more reliable frameworks that can balance social responsibility with financial viability.