How do companies perform when they have a woman as CEO? The new Hypatia Women CEO ETF (ticker: WCEO) tracks every public company in the U.S. that has a woman as CEO, allowing investors finally to back all these companies at once. Patricia Lizarraga, managing partner of Hypatia Capital, an asset management firm focused on investing in women in leadership since 2007, joins American Banker to discuss the state of women's leadership at the top of public companies, and why it matters.
Transcript:
Chana Schoenberger:
Hello, I'm Chana Schoenberger. I'm the Editor-in-Chief of American Banker, and I have with me here today Patricia Lizarraga, who is the managing partner of Hypatia Capital. Welcome.
Patricia Lizarraga:
Hi Chana. How are you? Good.
Chana Schoenberger:
So tell us,
Patricia Lizarraga:
First of all, thank you so much for having us.
Chana Schoenberger:
Well, thanks for coming. Tell us, first of all, I always find this fascinating. The name of your firm: who's Hypatia?
Patricia Lizarraga:
So Hypatia. Hypatia is Hypatia of Alexandria. She was one of the last neo-Platonists. She was the daughter of the head of the Library of Alexandria, which was, we could say the Harvard of the time or maybe the Yale of the time. And she was, she's credited as being the first female mathematician and astronomer published.
Chana Schoenberger:
Wow. Okay. So, strong woman leader.
Patricia Lizarraga:
So when I was looking for a name for this firm, I was thinking who was the first woman mathematician, who was the first one of the first women scientists. She was both a mathematician and a scientist. And in doing my research, her name came up. And so I just thought it was fascinating.
So that is very cool considering that most people name a fund like this after the address of their country house or something boring. I think that's really interesting. So I invited you here today because you have started an ETF of companies that have female CEOs with the ticker $WCEO, which is kind of easy to remember. Before I ask you about that, let me just ask you a little bit about yourself. Tell me about your career and how you got here, because you've been on Wall Street for a very long time.
Sure. So I've spent virtually my whole career on Wall Street. I was very lucky to start at two fantastic firms, Allen and Company and DLJ, both very famous in their own right. And I kept in that investment banking, merchant banking business for a while. And at the time, and even today, there were very few, had very few female clients, very few female CEOs, very few female CFOs, and the people that you as an investment banker would be collaborating with. But when I did have a female client, invariably I thought she was one of the top professionals I'd ever met. And that got me to thinking, why are more people not investing in women in leadership and why am I not investing in women in leadership when I think they're performers? And I think also just from a societal point of view, I'd like to be in an industry that wasn't so male dominated
And it really is quite male.
Patricia Lizarraga:
So that was the beginning of Hypatia Capital.
Chana Schoenberger:
Interesting. Okay. So why do we need an ETF of female CEOs?
Patricia Lizarraga:
Well, first of all, our investment thesis is that female CEOs will outperform the market. And the reason we believe that women CEOs will outperform today is because it is harder for women to become CEOs than for men to become CEOs. So the fact that it's harder, they have to jump over obstacles that the norm doesn't have to, and the norm is men, right? Over 90% of CEOs are men, that means that in order to get over those higher obstacles, they must have something extra. And so if we've always thought if we could isolate that performance, if we can isolate that female factor, we should be able to get some performance. And it took us a long time to figure out how to do it, but I think we finally got there. And so the first reason we need that ETF is because everybody's looking for performance. Everybody's looking for a factor that will outperform the market. And we think it's women CEOs.
Chana Schoenberger:
So if the women at the top are, if that's a signal that a company will outperform, then this should be the most obvious thing ever. Why aren't companies simply promoting more women in the first place?
Patricia Lizarraga:
So I think that there's a lot of reasons that are written about extensively of why the obstacles exist and there's different opinions, but I think, I haven't really talked to anybody who wouldn't agree that there are obstacles for women to be selected. And part of that I think is something that is, people aren't used to seeing women in leadership and therefore it's seen as riskier. So if you think about a board of directors selecting their next CEO, they're trying to pick the sure thing, right? That one person that it's so clear that they're going to take the company into value creation mode, and therefore anything that's riskier might be something that they don't select. So I think in some scientific circles, it's called pattern matching. I don't know if you read the book by Julie Bernstein, How Women Lead, she refers to it specifically with respect to selecting women's CEOs. So I think that has something to do with it.
Chana Schoenberger:
It's always been so interesting to me as someone who observes leadership and as a journalist, someone who writes about it is this idea that all human resources is micro. You can talk about the broad sweeping themes and the data across industries, but every human resource decision is, especially with promotions or hiring at a senior level, comes down to a micro decision between two or three individuals. So it's not, we need a woman in the role. It's I like Joe better than Susan. And so no one thinks, well, we need Susan because we have to advance the cause of women in the world. They think we need Joe, or we need Susan, for a unique, something related to them personally. And it's the amalgamation of all these micro decisions that leads to the data that you get across the industry.
Patricia Lizarraga:
And that's why I believe we need more female CEOs. We need female CEOs to have more visibility so that pattern matching starts changing. And there's all kinds of myths around female leadership or male leadership. And the data does not always, the data doesn't always tell the same story as the myths. So for example, there is this myth among certain circles sometimes that women don't help other women get up that corporate ladder.
And the fact of the matter is that the facts say something completely different. If you look at, and now the WCEO ETF has the dataset, right? Because we invest in all American public companies with a female CEO that are $500 million market cap and above. So we know all 127 of these women, and we can measure them against any index. And it's basically men versus women. So for example, if you look at the senior leadership teams of female CEOs, they're 80% more female than the men. They're still only 35%. So the senior leadership of female CEOs is 35% female, 65% male, but the male leadership teams are 80% men and only 20% women. So to get more women into leadership, it starts becoming a virtuous circle. And then as that pattern matching decreases, we will move towards equal opportunity, which is what we hope for. We don't want 50% of women just because it's a number. We want to have the best candidate in the job.
Chana Schoenberger:
And once you get past the point where everyone is a token or everyone is the first, then it becomes about the individual leadership skills of each specific person. It was interesting because last week we had our
Patricia Lizarraga:
I think there's not just one myth, there's many myths. And we definitely now have the data set to start talking about how those aren't really true. So that's exciting. That's something that we, we've started to write about is the differences we're finding.
So you said 127 CEOs are on this index. What industries are they from? Are there industries that are more female than others?
There are industries that are more female than others, but our WCEO ETF is industry neutral to its benchmark. And why is it? And we're benchmarked to the Wilshire small cap index because Wilshire is our calculation agent. But why did we do it that way? Because again, we were trying to isolate the female factor. We didn't want to make it about the industry that's more women. And we didn't want to make it about size because women, obviously, not obviously, but women in general are managing smaller companies. So what we did is we made it industry neutral. So whatever percentage each industry has in the Wilshire Index, we will have that percentage of that industry in the WCEO ETF. And the easy way to see that is when you look at our list, you'll see that our biggest holding is usually Occidental Petroleum. And why is it Occidental Petroleum? Because there's very few women in energy. So our energy stocks are overweighted versus our consumer stocks, which are, there's more women in those industries. So in order to be at the right weighting for that industry, we have to underweight those stocks.
Chana Schoenberger:
Oh, that's interesting. That makes sense. Yeah, no, I mean we see this a lot in banking and finance as well. So if you look at the top 50 banks by asset size, only one of them, Citigroup has a female CEO, and the rest are all male. Incidentally, other than two or three of them, they're all white males too. So really it's a lot of white people at the top of banking. They have a unique problem in banking, which is that they're very good at hiring women at the entry levels, no problem whatsoever. Even a majority, typically cashiers tellers, call center reps, these are plenty of female representation in those roles. But when you get to the higher levels, it's just a pyramid. And of course, any management structure is a pyramid anyway. It's up or out. You don't have as many managers as you do call center reps. That's just obvious. But they're increasingly women are not getting promoted. And it was interesting because McKinsey came out with a fascinating study last week, which they presented to us at our event talking about what they're calling the broken rung. And they said that you can really see it at the very, very bottom. So a woman will get promoted and to the point and at the same level as men to the point where she manages a team and that first step of becoming a people manager. So you might be call center rep and then an associate call center rep and a senior call center rep. But when you're going to be the assistant manager, that's where men start taking over, and that's where women either stagnate or they get pushed out. So it's a problem for the industry because it becomes not a recruiting problem, but really a promotion and retention problem. You have to do it at the beginning. You can't do it at the end. By the time you get to where you're considering CEOs, those people have many years, even decades of experience, and you can't just manufacture that on site.
Patricia Lizarraga:
Absolutely. I don't know if you know this, but I'm actually on the board of the largest bank in Peru. It's been around for over a hundred years. And so we talk about that, and I'm not on the nominating committee, I chair the audit committee, but we are trying to figure out how to get more women into higher positions.
Chana Schoenberger:
So what sort of things are you looking at?
Patricia Lizarraga:
So one of the things that the directors, there's three women directors now, and when I started, I was the only one, but now there's three of us. We actually went and talked to the top 60 or 70 managers in the bank to see why they were there and what had helped them get that far. And it was really interesting. It was with the head of talent and ourselves, and we just heard these amazing stories of the bank and their managers going out of their way to make sure they came back after they had kids to let them. The bank really, I think, was quite flexible with the women they wanted to keep. And so that's why they're there. There's still not enough of 'em, right? So the question is, how do we get more managers to act that way? How do we get to keep more of our top talent? The talent comes in the door. The question is why does it leave? Even in the US and investment banks, my understanding is that it's 50/50 at the beginning, at the analyst level, why do we lose the talent? And I think that that's something that people care about today in a way they didn't before perhaps.
Chana Schoenberger:
Yeah. Well, it's like customer acquisition. It's much easier to keep a customer you already have than to acquire a new customer in the same way. It's much easier to keep an employee that you like and respect than go out and recruit another one that's expensive. Why do that? Exactly. It is interesting though, because a lot of it is this phenomenon of, you have to want your boss's job. If you don't want your boss's job, you need a different job. And a lot of it is making the boss's job look attractive to women at these lower levels so that they, no, this is not the thing about them being promoted. This is the thing about them quitting. Otherwise, they're just going to say, I don't want to work here. I don't aspire to doing the job that my manager does.
Patricia Lizarraga:
Or being in that lifestyle. I mean, one of the reasons I did start Hypatia was because once I was a managing director for years, there just weren't that many women managing directors. I didn't have women clients, I didn't have women investors. And I said, I would like an environment where I had a more collegial experience with the people I'm working with. The only way to do that is to start from scratch because it's not going to happen at any one bank. I think, the largest banks, I think there's a lot of them that do an extraordinary job of having more, there's many women managing directors at the big banks, but as a percentage, they're still pretty small.
Chana Schoenberger:
Right? No, definitely. So what is it like to launch an ETF? What's involved in that?
Patricia Lizarraga:
So launching an ETF, first of all, the ETF wrapper is amazing. What the financial industry has allowed you to do is to be creative. And I think what I love finance about Wall Street is it's really about creativity. So if you have an idea that you think there's a product market fit, then you can create it. And the ETF wrapper allows you to go to market quite quickly. It's highly regulated. It's a '40 Act security. So there's regulation, but there's also infrastructure to be able to plug into a regulated trust that you can then launch your ETF on. So the people, the firm that we work with, Ultimus, I mean they were great. They really just helped us go from zero to launch in a very short time. What took us a long time, actually, Chana, was to figure out how to isolate the female factor. How do we make sure that we're delivering that female alpha to build that? There is no database. We had to go back the six years and see every single woman when she was in, when she left, put in, just create that whole database from scratch. And that took us quite a long time. The actual mechanics of the ETTF now are easy. To launch an ETF today isn't that hard. What's really hard is to scale it. I mean, we have thousands of people in our network, and all of these people in our network believe that there should be more women in leadership. But how do we get them to go and press buy on E-trade to WCEO ETF? And that's the challenge of an ETF right now is how do you get distribution, even if you have a good idea, even if you have, it's not a charity.
Chana Schoenberger:
Right? It's not a charity, I mean, this isn't a GoFundMe campaign. This is an actual investment product with performance that's trying to actually make alpha for people.
Patricia Lizarraga:
Exactly. And I mean, nine months is not a long track record because we launched on January 9th, but right now we launched with a benchmark that's an index. Obviously, we all know you can't really invest in a Wilshire small cap index, but you can invest in the S&P small cap index, you can invest in the large SPY, but there's also SSPSM, and in nine months we're beating them by a hundred basis points.
Chana Schoenberger:
Wow. A hundred basis points.
Patricia Lizarraga:
So it's really 180 basis points because remember, we have an 85%, we're an active ETF, so we're cheap for an active product, but we're expensive for a passive product. So we have to be so good that even though we're cheap for an active product, we still outperform what we're charging extra. And right now we're outperforming a hundred basis points as of today.
Chana Schoenberger:
Why isolate female CEOs and not say percentage of female board members, percentage of female managers, total female workforce?
Patricia Lizarraga:
Because if we wanted it to be very clean and explainable, we believe that there is alpha in female CEOs because it's harder for them to get to the top. So we wanted to be able to give that one person the value creation attribution. And if you start spreading it around, then you'll never be comparing apples to apples. There is so much research saying, oh, women outperform, diverse teams outperform, but it's never comparing apples to apples. So you get the disbelievers, right? And I could tell you that I've had this conversation with maybe an ex-dean of the Harvard Business School. I was telling him what I was doing and he said, oh, there's so many studies and they're contradictory. And I said, well, now I'm coming out with an index that's definitive and that will not be able to be contradicted because you've got men and you've got women and one of 'em is outperforming. So if the women are outperforming, you can have lots of reasons for why, but the fact is it's either performing or it's not,
Chana Schoenberger:
Right. Investors don't care why.
Patricia Lizarraga:
And that's why we said we want to make it something that is, it's not subjective, it's objective, and it's definitive. And that's why we include all the women from a technical point of view.
Chana Schoenberger:
There was a study that came out that the National Bureau of Economic Research did, or one of their researchers did, I want to say a year or two ago about wealth management. And it was a very similar idea. It was that if you look at the socioeconomic background of wealth managers, I don't think that it included race. I think it was just socioeconomic that if someone who had grown up in poverty was objectively a better wealth manager, that someone who hadn't, and the reason they came up with was this person had to fight so much harder to get into the elite networks and go and work at a big wealth management firm that by the time they got to the point where they were managing other people's money, they were better than their peers.
Patricia Lizarraga:
I haven't seen this study, but I'm going to look for it because I think it sounds really interesting. And I think what's happening in the wealth management industry is fascinating. The distribution channel that we're supposed to be, we've been advised to start talking to are the independent registered investment advisors. And so these people, what they want to do is grow their asset base and how do they grow their asset base by getting more clients? How do you get more clients? One of 'em is to focus on what the client wants to talk about. So what we're telling the independent registered investment advisor community is bring the WCEO ETF up with your female clients. Say, have you seen this? What do you think about it? What do you think about it? Get your client's opinion, get them engaged, and whether or not they decide to invest or not or you recommend it, it's about getting close to what your clients want to talk about. And the fact of the matter is, women, we know, the research tells us women do care about this topic.
Chana Schoenberger:
They definitely care. One of the interesting things that came up at our event last week, so we had of course,
This is something that the ultra wealthy could always do, and the mass affluent could do increasingly. And now literally anyone can do it. You can go out and you can buy a range of ETFs or a range of products like direct indexing that will allow you to just invest in the things you want and crucially to not invest in the things you don't want. So whatever your personal environmental or social goals, it doesn't even have to be that way. You could be very pro something or very anti something, and you can make your portfolio look that way. So this would seem to be a real example of that.
Patricia Lizarraga:
Yes, and this is a trend, but it's not big enough yet. The mass of investments in the United States is managed by advisors and on the big platforms, so they won't let an ETF like ours on their platform until we're already big. So the Morgan Stanleys of the world, the Merrill Lynch's of the world, the JPMorgans of the world, I love everything they do, and actually, they're quite supportive of what we're doing, but they can't put us on the platform because we're not big enough because we don't pass certain criteria, which I understand, but it's kind of a vicious circle in that way.
Chana Schoenberger:
How big would you have to get?
Patricia Lizarraga:
So the big platforms want you to be at a hundred million before they end a year track record before they'll consider putting you on their platform. And I do understand why. And although I don't understand why, right? There is no risk to an ETF that is in 127 liquid securities. Our smallest company has a $500 million market cap. The ETF wrapper is a very safe wrapper from that point of view, both from creation and the opposite if you want to sell it. But I understand that I'm not saying anything other than they obviously want to have a criteria. That's right. And they do actually, except for Merrill, all of 'em will let a client buy WCEO ETF on an unsolicited basis. But how do we get that investor to call her advisor and say, can you please buy me X shares of WCEO ETF? It's really tough. And so that, I think what's happening is it's a damper on that creativity and that personalization that Jenny's talking about. Because if the personalization and creativity can only come through large platforms, which by definition the creator is very far away from the customer facing individual, then we're not giving the market some of the creativity they might want. Right? The person who's thinking up the new ETF at Merrill Lynch is probably not anywhere near the person who's talking to the investor, to the individual investors.
Chana Schoenberger:
That sounds like a sticky business challenge.
Patricia Lizarraga:
Yeah, it is. But there is the ability to talk directly to the public, right?
Chana Schoenberger:
Sure.
Patricia Lizarraga:
In a way that if you're doing, because within certain parameters, obviously the '40 Act and the SEC is very strict in what you can, and you cannot say, and they should be strict about what you can and you cannot say, but you can advertise. And today with the social media, you can reach a lot of people in a way that perhaps 10 years ago, well, the wrapper really didn't exist on the way it does today, and the access to mass influence didn't exist.
Chana Schoenberger:
Great. Well, we only have a couple of minutes left. Tell me what your hopes are for this ETF and sort of for women in leadership as a whole.
Patricia Lizarraga:
I'm a big believer in investing women in leadership. I built my company 15 years ago on this concept, and I believe that a balanced world is a better world for everybody. And almost every type of, in any subject that we can talk about and leadership is just one more of those. I think balance is better. And what I hope is that over the years that we have more holdings in our portfolio because there's more women CEOs, so we're not going to get to 3000, but if we can get to 300 or 400, then we'll be able to also make different CEOs about women in leadership or women CEOs or the CFOs or the boards. We can do different variations, large, medium, small, et cetera. But for today, what we really need is to get individuals to pull the trigger and say, I'm going into my Schwab account and buying X shares today so that we can scale and we can get on the platform and we can start talking about more about this irrefutable fact that females create alpha, female CEOs create alpha.
Great. Wonderful. So exciting. Well, I really appreciate you coming to talk to me today, and great seeing you.
Chana Schoenberger:
Thanks, Chana. It's wonderful to see you as well.
