Is there a trade-off between diversity and investment success?
It’s a standard query with a transparent answer: no
This is my conclusion after carrying out one detailed literature research on the connection between diversity and investment risk and performance.
An overview of the study
In total, the research I analyzed includes 56 studies published over the past 28 years, which together examine nearly 50 years of knowledge. They mainly give attention to gender diversity. In fact, 45 of the 56 only examine gender diversity. Only 11 considered racial, ethnic, and other kinds of diversity, and most of this cohort also considered gender diversity.
This emphasis is basically a function of the available data. Information about first names and pronoun usage is quickly available to researchers and might use it to make assumptions about gender. To study other types of diversity, nevertheless, researchers need self-identification data, which is harder to search out, although some clever studies use public details about portfolio managers’ birthplaces to look at cultural and socioeconomic diversity. However, whatever the differences between the methods and focus of the studies, the outcomes are broadly consistent whatever the type of diversity analyzed.
52 of the 56 studies give attention to portfolio management. About a 3rd of those examine diversity on the team level, the remainder at the person level. The 4 remaining studies consider the ownership structure of the firm hired to steer the investment team. Of course, for a lot of corporations there will be significant overlap in ownership and portfolio management.
Diversity and investment performance: The results
Against this background, the next findings regarding investment performance emerge:
- No difference or mixed: In 15 cases, performance was found to either not vary or to perform higher only under certain circumstances, whatever the manager’s characteristics. Most of those were academic studies of mutual funds.
- Outperformance: 26 results found a connection between the outperformance of diversity ads. More than half of them were based on studies of hedge funds, private equity funds or enterprise capital funds and were prepared by industrial corporations.
- Underperformance: Seven findings linked diversity to poor performance.
(These 48 results don’t add as much as the 56 total studies because some studies have multiple results on performance, while others give attention to risk or other portfolio characteristics and don’t draw conclusions on performance.)
In my estimation, the evidence for “no difference or mixed” is strongest. Why? Because such results are heavily biased toward academic studies, which are inclined to be risk-adjusted, peer-reviewed, and based on standardized and rigorously audited mutual fund data.
Nevertheless, the impressive performance of the Outperformance category suggests that diversity can have a more positive impact on investment performance. Overall, the evidence suggests that diversity is related to performance that’s a minimum of nearly as good as average.
Investment performance and variety: focus and conclusion of the research results
Diversity and risk
More than half of the studies cope with portfolio risks. The results seem clear at first glance: almost two thirds associate diversity with lower risk.
However, in the case of risk tolerance, a distinction have to be made between private investors and skilled investors.
The results for personal accounts are quite consistent. There isn’t any evidence that girls are at greater risk than men. These studies are based on large data sets, similar to all accounts at a big brokerage firm. Their findings are among the many oldest within the literature and have been repeated usually over the past 28 years. They have almost develop into accepted wisdom.
Although there could also be a powerful relationship between gender and risk taking in personal accounts, aspects apart from gender may influence the outcomes. While most studies take income and marital status into consideration, other aspects also can influence risk tolerance, similar to risk tolerance and financial knowledge. According to a cross-national study, in countries with greater gender equality, there aren’t any gender differences in risk taking, supporting the hypothesis that gender doesn’t determine risk.
Studies of skilled investors’ risk tolerance further support this hypothesis: Eleven of those studies find that female skilled investors take less risk, 4 find no difference in risk tolerance, and 4 find that girls take more risk.
Overall, this literature suggests that the outcomes could also be driven by something apart from gender. Future studies will hopefully give attention to what this driver may be.
Diversity and risk in investing: Research findings
Diploma
The evidence shows that diversity and investment success coexist. Investors do not have to choose from the 2.
For more information on the connection between diversity and investment results, click here “Diversity and Investment Success: A Summary of Research.”.”
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