Nucleus Wealth introduces diversity option for investors

From

Damien Klassen

Diversity issues have exploded into the global zeitgeist over the past few months as Black Lives Matter protests have rocked cities around the world.

Locally, AMP’s decision to appoint and executive with a (verbal) sexual harassment transgression on his file to a CEO position has focussed attention on the group’s lack of females on its board (one) and management committee (one).

“Increasingly, we are finding that for some clients a lack of diversity in companies is important and consequently we have added ‘diversity’ as an ethical exclusion, says Damien Klassen, head of the Melbourne-based superannuation and wealth manager Nucleus Wealth.

“This gives investors the option to strike companies from their portfolio that don’t have enough gender diversity in their board and management team.

“In an investment climate where diversity, specifically gender and race, are front of mind issues in the community generally two questions are suddenly more prominent.

“Does diversity improve financial performance? And, how can I, as an individual investor, express a preference for companies with diverse boards and management?” says Klassen.

Klassen notes that from an investment perspective, diversity is an interesting concept.

“There have been a lot of studies into the diversity of gender and race on company performance with, yes, diverse results. It still appears to be a good, but far from infallible, indicator of more innovative companies.

“On the positive side, group diversity increases networks, resources, creativity, and, importantly, innovation. On the negative side, more diversity can lead to less communication, increase group conflict, lower satisfaction and increased staff turnover.

“From a quantitative perspective, corporate governance is a factor that outperforms, that is, companies with good corporate governance tend to perform better than those with weak corporate governance.

“For governance scores however, we use them as a negative screen rather than a positive one. That is, bad governance can make a quality score worse and therefore the company needs to be cheaper before we buy it.

“But we are not choosing to buy a company with 42% gender diversity over the one with 39% on that measure alone. Many of the governance scores are like that – there is a definite ‘bad’ option, but we believe there is little sense trying to rate the difference between two good options.”

“As for how individual investors can express preferences for companies with diverse boards and management, Nucleus Wealth is one of a small number of fund managers that allows investors a deep, bespoke approach to ESG and that now extends to one of its subsets, namely ‘diversity’,” says Klassen.

Nucleus manages stocks within the domain of the 1600-company MSCI World Index, a common investing benchmark containing only very large companies.

Every investor’s stocks are held in a separately managed account (SMA), meaning they can filter investments for major all ESG metrics including, now, diversity.

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