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In Rocky Markets, Female Fund Managers Take Less Risk for Same Performance as Men: Study

By Dinah Wisenberg Brin

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What You Need to Know

  • Male-managed portfolios have higher total risk and unsystematic risks when sentiment is bad, the research found.
  • Funds managed by women have about 50% lower unsystematic risk during those times.
  • Despite the difference in investment behaviors, performance outcomes show no statistical difference.

U.S. mutual funds managed by men take on significantly more risk than those managed by women when market sentiment is bad — that is, when stocks are likely undervalued — but achieve no performance advantage, a study from Germany suggests.

Male fund managers hold portfolios with higher total fund risk and unsystematic risk (risks related to a particular stock or sector) when sentiment is bad, while female managers’ portfolios hold about half the unsystematic risk as those managed by male counterparts during those times, according to the research, which sought to explore whether make and female managers react differently to sentiment.

Pricing models suggest that “the higher level of unsystematic risk is not associated with higher fund performance, nor are there any performance differences between male- and female-managed funds,” wrote researchers Monika Gehde-Trapp of Eberhard Karls Universität Tübingen, and Linda Klingler, University of Hohenheim.

“Therefore, we conclude that fund investors bear unrewarded risks in the portfolios managed by male fund managers due to the latter’s more active bets,” they added.

The researchers studied a sample of diversified domestic U.S. equity funds run by solo managers from January 1992 through December 2015, classifying funds as male- or female-led based on the managers’ first names. They used the VIX volatility index as their main sentiment measure.

The research included portfolios from major U.S. fund companies, Gehde-Trapp told ThinkAdvisor via email. Funds could be large-cap growth or small-cap value and so forth, but no bond funds or portfolios focused on non-U.S. companies. 

“Most research shows that female investors take less risk than male investors,” she said. “No matter whether one looks at retail investors or professional investors: Female investors are more cautious, trade less frequently — and thus create less transaction costs — and do not switch their investment styles so often.

“Interestingly, male and female fund managers ‘create’ the same performance,” she continued. ‘Again, this is what basically all earlier research shows. So our results are consistent with that: Different investment behavior, but the same outcome for the investor.”

Gehde-Trapp and Klingler looked at a specific aspect of risk-taking: a manager positioning  against irrationality in the market. “That’s a risky strategy” that can produce a win when the market cools but a loss when people panic more or get more “irrationally exuberant,” according to Gehde-Trapp.

“We show that female fund managers take on less risk — both generally, in line with earlier research, and in these situations,” she added.

Whether this is good for investors depends on what type of risk the fund manager takes on, said Gehde-Trapp. 

“We show that male and female managers take on the same amount of systematic risk — the type of risk that generates a risk premium. But male managers take on more unsystematic risk/more active ‘bets’ than their female colleagues. That does not pay off for the investor,” she said. “Our conclusion: Investors can avoid taking on unnecessary, uncompensated risks when investing in funds managed by women.”

The takeaway is not so straightforward for mutual fund companies, according to Gehde-Trapp. “Male fund managers attract higher inflows than female managers even though performance is the same. But fund companies earn fees based on a fund’s assets under management! So a male fund manager pays off more for the fund company via higher fees.” 

Dinah Wisenberg Brin

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