The New 'Free Lunch' Diversification
Nobel Prize Laureate dr Harry Markowitz (Nobel Prize 1990) taught us that diversification can create value by reducing risk levels more than that returns will suffer when combining different investments ranging from high-return, high-risk to lower-return, less-risk. And yep, if you click on the link to Markowitz in Wikipedia, one of the articiles in Selected Publications is joint work with your author, LMG's co-principal Erik L van Dijk.
This 'free lunch' is a reality of life most-of-the-time, but not always. Markets are also moving dynamically, with new asset classes and countries gaining in importance and others going into oblivion. At the same token the process of 'Globalization' will have an impact on diversification, because Globalization will increase correlations between asset classes and countries, thereby making the potential gains from diversification smaller.
But research has indicated that there is another type of diversification with potentially untapped, and maybe even larger potential benefits.
Dutch newspaper De Telegraaf reported on Karmijn Capital
a firm led by 3 women with decades of experience in Private Equity and with a very interesting strategy. As one of their prime filters when selecting their investments they look for firms with above-average female boardroom presence. Required: a female CEO and/or 25-75 percent female board representation. Just another effort by feminists to discriminate positively?
|Women in the Boardroom? Facts show that it does make sense!|
McKinsey research has indicated that gender diverse companies generate 10% higher returns on equity and 48% higher earnings before interest and taxes (EBIT). Companies with more women in the board outperform those with less women by very high margins, both with respect to Return on Equity and Return on Investments. And even when we look at negative statistics we do see a positive difference in favor of the gender diverse companies. When analyzing bankruptcy statistics, Graydon found that 14.6 percent of entrepreneurs involved in a bankruptcy were women and 85.4% were men. If we compare that with the fact that about 25 percent of entrepreneurs in the sample was female and 75 percent male, women are underrepresented by 10.4 percent in the negative category, with men overrepresented by 10.4 percent.
Logical? We believe so. Behavioral and neurological research indicates that women are better multi-taskers and entrepreneurship is a complicated activity that involves a lot of multi-tasking. On the other hand, men are hunters, good in activities that require a lot of focus and quick decision taking. But with the bulk of management boards or entrepreneurs being male, an overfocus on these qualities could easily lead to trouble. Men do also have a tendency to overestimate their qualities when successful, whereas women's careful combination of various factors in a more realistic multi-factor setting will provide a countervailing power that - when combined - will lead to a better outcome. Other research has also indicated that when looking at stock market results, this mutlifactor/multitasking quality has also resulted in women being at least as good - if not better - than herds of their male peers.
But still: inner circle effects, glass ceilings and the competitive strengths of men in inner-office 'combat' - in combination with cultural factors - have led to a situation in which women are underrepresented. LMG believes that the strategy of Karmijn - when applied in an objective manner without falling for a positive discrimination like trap - does hold a lot of potential, and we will carefully follow the initiative to find out if it could be of interesting to our investment clients, be they institutional or high net worth investors.
|Gender Diversification: A Free Lunch within Private Equity?|