Why do Female Fund Managers Outperform?

It is estimated by Bella Research Group and the John S. and James L. Knight Foundation that less than 5% of hedge funds are women-owned. There are a good handful of male-run funds. But a study by Hedge Fund Research noted that women hedge fund managers delivered nearly double the performance of men from January 2000 through May 2009. More recently, during the Covid shutdowns of early 2000, women led funds were down only -3.5% versus other funds which lost -5.5%. Furthermore, during the market rebound from March-August 2020, 48% of female led funds beat the market, versus only 37% of male managed funds, according to a study by Goldman Sachs. In a persistently male-dominated industry (and I mean male-dominated by a staggering amount!), how are women portfolio managers able to outperform?

Some believe that women outperform their male counterparts because they trade less frequently, have a longer-term view, think more openly, and are less over-confident when it comes to assessing risk. When I was first promoted into a position managing a team of brokers at Charles Schwab, my father told me this: “to be a good manager of other people, you must first learn how to manage yourself.” When I launched the Pawleys Dividend Fund and Pawleys Growth Fund, his words rang in my head – I had better be able to manage myself and my emotions well if I wanted to manage a portfolio of stocks well! I knew I had a good portfolio construction process and stock selection methodology. In my opinion, what derails investors is the emotions of fear, greed, and overconfidence. We become reactionary during extreme markets – to the upside and downside. And we become married to our ideas and seek information that confirms our opinions, as opposed to consistently questioning and testing our beliefs. Core principles are key to delivering good investment performance, but it is critical to be continually working to improve portfolio management processes. Perhaps women tend to be more thoughtful and less apt to have exaggerated knee-jerk reactions?

I don’t beat the market every year, but the numbers speak for themselves, and am humbled yet proud to be a part of female-owned firms that consistently outperform the boys club of Wall Street.

Source: Forbes, Hedge Fund Research, Goldman Sachs Investment Research.

How the Shiny Ball Bounced from Crypto, to Tech, to the Banks who Loved Them

Last week, there was an FDIC insured Certificate of Deposit offered yielding 13.8% and maturing in just 2 short weeks, while other banks were paying substantially lower for the same term. If it sounds too good to be true, it likely is. Investors get paid to take risk, so it was no surprise when the next morning that issuer, Silvergate Bank, announced a voluntary wind-down of operations and liquidation of the firm. Silicon Valley Bank, which lends primarily to start-up technology companies, was taken over by the FDIC yesterday. How can a bank such as Silicon Valley with over $200 billion in deposits fail?

When the economy is a bit too hot, the Federal Reserve increases short-term interest rates to gradually cool things off. Just a year ago, short term rates hovered above zero. During March of last year, the Federal Reserve initiated a series of increases to the Fed Funds Rate, which is the rate banks charge each other for overnight lending to meet reserve requirements. Today, after a series of the most dramatic increases ever seen, that rate is 4.5%-4.75%. Rising interest rates favor banks in that they can charge more on loans they issue, however as rates rise, the value of the fixed income investments in their portfolios falls, which can pressure their balance sheets and hamper their ability to meet customer withdrawals. A rising interest rate environment will separate strong banks from the weak. As rising rates slow the economy, other sectors of the market are also differentiated and previously high-flying investments fall out of bed. These two banks show how intertwined risks can become.

The crumbling of FTX last year catalyzed the beginning of the fall of cryptocurrency, which was the canary in the coal mine for frothy, speculative investments. Silvergate Bank, based in La Jolla, California, was the posterchild of froth as they had very few retail customer deposits, and held deposits of speculative venture capital funded start-ups, unproven technology companies, and, of course, cryptocurrency. It also operated an exchange to convert cryptocurrency into dollars, the Silvergate Exchange Network, which was shut down a week ago. No surprise that the largest customers on their exchange included FTX and Alameda Research. Silvergate Bank was founded in 1988 with a focus on real estate lending, but over time got lured into the shiny-ball markets of cryptocurrency and hot new technology companies. Rising interest rates and tumbling crypto prices ultimately led to a classic run on the bank and forced Silvergate to sell bonds at losses to meet demands. The weakness of speculative investments in crypto and unprofitable nascent technology companies were intertwined for Silvergate, as their business was almost solely concentrated in these spaces, and led to their failure.

The Silvergate and Silicon Valley failures come as no surprise as their business models were not properly diversified and were heavily concentrated in speculative areas. The chart below shows that Silicon Valley Bank (SIVB) was an extreme outlier – the strongest banks are in the upper left corner, and the banks with the riskiest profiles are in the lower right corner. Last December, I sold shares of Bank of America (BAC) from the Pawleys Dividend Fund, and added to shares of JP Morgan (JPM), as JPM has a lower risk-profile than BAC. Financial stability becomes increasingly important as the economy slows. This holds true for all sectors of the market, which is why I avoid frothy investments and focus on selecting stocks of companies with little or no debt, solid earnings growth, and rock-solid cash-flow. The historical performance numbers speak for themselves.

Sources: JP Morgan Asset Management, Silvergate Bank and SVB Financial (parent company of Silicon Valley Bank) Quarterly Filings.

A Different Super Bowl from Last Year

Last year, like in 2000, the commercials during the Super Bowl were dominated by the hottest current investment themes: Cryptocurrency and sexy new technology companies. Please see my post from last February addressing what a mistake it can be to put your hard earned dollars into unproven trends, often hyped by celebrity promoters who have little knowledge of complex investments (hint-hint: Tom, Gisele, and FTX). These high-flying “FOMO” (fear of missing out) ideas of the past abruptly stopped working last year, and many who had chased the shiny ideas of Crypto and NFTs incurred very significant losses.

This year, we won’t see commercials from potential high-flying investments, but from from more down to earth consumer companies. We will see, however, a cool all-female team of Navy high flyers soar over State Farm Stadium to celebrate the start of the game and 50 years of women pilots in the military. I too, have stood on the shoulders of women who were early to my industry. This week in Miami one of the biggest industry conferences was held, and there were several tributes to Kathleen Moriarty, who was a pioneer in the investment world, and instrumental in creating the first Exchange Traded Fund. Muriel Siebert was the first woman to hold a seat on the New York Stock Exchange, joining the 1,365 male members in 1967, the year I was born.

For decades, women have broken the sound barrier to enable me to soar in the investment world today. The Pawleys Dividend Fund and Pawleys Growth Fund have consistently outperformed the market, as we select stocks of companies with little or no debt, consistent earnings growth, and rock-solid cash-flow. There are numerous studies that show female fund managers perform better than their male counterparts, yet only a tiny fraction of funds are women-led. Women are still taxiing down the runway to gain more market share, and our soaring performance will get us there.