COLUMN-As 'Fearless Girl' sponsor retreats, so do diversity fund flows: Ross Kerber

By Ross Kerber

March 12 (Reuters) - When fund manager State Street installed the bronze statue known as "Fearless Girl" in 2017 to stare down Wall Street's massive "Charging Bull" sculpture, it was hailed as a breakthrough moment in financial messaging.

Even before the #MeToo movement took off, the statue and the fund it promoted, now known as the SPDR MSCI USA Gender Diversity ETF SHE.P, became symbols of how public investment products could drive social change.

But vibes shift. On February 28, State Street's STT.N asset-management arm issued new stewardship guidance that dropped targets for the number of women and minority directors it expected to serve on company boards.

State Street of Boston did not go into detail about reasons for the change, which came as much of Corporate America pulls back from diversity efforts, under threat of legal action by U.S. President Donald Trump's administration.

It's not a 100% retreat - see my colleagues' March 6 story about companies maintaining some diversity efforts behind the scenes. But clearly most CEOs aren't looking to pick fights in defense of environmental or social issues. Among financial firms, one reason might be some of their ESG-minded products have not turned into major hits.

State Street's gender diversity fund, for instance, recorded net withdrawals of $16.3 million last year, its third straight year of outflows after it took in $81 million during calendar 2021, according to Morningstar.

With $309 million at the end of February, the fund is the second-largest gender-diversity fund. The largest, the $733 million Impax Ellevate Global Women's Leadership Fund, posted a similar pattern of flows including net withdrawals of $189 million last year. The same held true overall for the eight funds and ETFs that Morningstar counts as being related to gender diversity themes.

The index used by the State Street ETF emphasizes companies that show a commitment to having women in leadership roles. The ETF had a total return of 23.33% last year, beating only about half of peer funds.

A State Street spokesman said the flows reflected the short-term underperformance, as with other strategies that weren't concentrated in a few high-flying companies.

The Impax fund has a similar mission, and returned 12.08% last year, trailing 64% of peers. An Impax spokeswoman said the flows in part reflected reallocations to bond portfolios and that it is a global portfolio competing with mainly domestic U.S. funds. Competition with more concentrated funds also played a role, she said.

Ed Farrington, Impax President for North America, said via e-mail that "As an independent manager focused on the transition to a more sustainable economy, we are resolute in our commitment to themes which are important to our clients and that we believe can drive attractive risk-adjusted returns."

"With a number of managers walking away from these important themes, we think there is even more space for a specialist such as Impax to add value and outperform over time," he said.

Hortense Bioy, Morningstar head of sustainable investing Research, said a question for gender-diversity funds now is whether they should consider tweaking their holdings when they next rebalance from companies that dial back on diversity commitments. Amazon.com AMZN.O for instance, a large holding of some of the gender diversity funds, in December said it would wind down some diversity programs.

"The next time they rebalance, they will have to check their data," Bioy said.