Why Diversity in Investment Management Matters


By Robert Raben

Robert Raben
Robert Raben

When I started the Diverse Asset Managers Initiative (DAMI) five years ago, it was in direct response to the insufficient use of minority- and women-owned asset management firms by institutional investors. Without an abundance of data to understand why these firms were not participating fully in the management of the largest pools of capital, we were constantly asking ourselves, “Is there just a lack of MWBOs in the field?” “Did it come down to an issue of performance?” “If so, did these firms not have the talent and resources needed to perform as well as or outperform their white counterparts?”

With these questions in mind, we knew we needed to start digging deep and gaining the institutional knowledge and resources needed to help diversify the asset management industry at large. As a starting point, we worked with Professor Jennifer Lerner of the Harvard Business School and the Knight Foundation on a study to compare performance by minority- and women-owned firms to that of their majority counterparts.

The data showed no difference between the performance of the two groups. In fact, the data highlighted that assets managed by women- and minority-owned asset management firms typically perform as well as — if not better than — those managed by non-diverse firms. Fiduciary duty states that the best managers should be selected as a reflection of the best interests of the asset owners they serve, so we sought to understand why this wasn’t happening: What explained the underutilization of women and people of color?

Could it strictly be bias? Or a networking problem?

We have started working to address the bias that underlies why talented women and people of color only manage a small percentage of our nation’s endowments and pension funds. That work has led to many revelations, including the lack of diversity in investment consulting itself — the search firms that advise most institutional investors, implicit racial bias among decision-makers, and failure to hire the best firms despite better performance.

DAMI recently outlined our prevailing issues at the Georgetown University for Retirement Initiatives’ (CRI) 2019 Annual Policy Innovations Forum, held at the University Law Center. During a panel discussion entitled “Generating and Protecting Lifetime Income: An Examination of Key Challenges and Solutions,” my colleague Justin Wilson was joined by leading experts in the field to discuss how we can make spaces more diverse and inclusive for all people, specifically in the financial services world. It was a pleasure to hear from John Adler of the Office of Pensions and Investments at the Office of the Mayor in New York City, Karen Andres of the Aspen Institute, and Dr. Annamaria Lusardi of Global Financial Literacy Excellence, as we delved further into how, why, and where people and institutions choose to invest their money.

Emerging Managers and Barriers that Affect Diversity

In 2014, the New York State Comptroller established an “Emerging Manager Program” where it invested $1 billion with emerging asset managers. In particular, they allocated $10 million to emerging minority- and women-owned firms after the state found out that emerging managers were not given the opportunity to manage large sums of investments — unless those managers could show a three-year track record. This was the most-recent notable attempt to diversify the field of asset management since the inception of CalPERS’ “Emerging Manager Program” in 1991.

More recently, the Committee on Financial Services through its Subcommittee on Diversity and Inclusion, chaired by Rep. Maxine Waters (D-CA), held a hearing that allowed stakeholders to address the barriers that women and minority asset managers face being considered to manage large institutional investments. One of the key witnesses, Juan Martinez, CFO at the Knight Foundation, reported that the organization’s 2018 follow-up study found that women- and minority-owned asset manager firms face significant diversity challenges in financial services, including the amount of money they are allowed to manage, biases on performance, and demographics of their teams.

In fact, in its study, the Knight Foundation revealed that out of the $71.4 trillion of fund assets that are actively and externally managed, only 1.1 percent of those are managed by minority- and-women owned firms.

What are State and Federal Governments Doing to Increase Diversity in Asset Management?

According to the Knight Foundation, minority- and women-owned firms tend to perform just as well or outperform their white counterparts, yet are often viewed as underperformers.

There are leaders in this field. In Fiscal Year 2017–18, New York State Common Retirement reported that after its Emerging Manager Program went into effect, the overall percentage of funds managed by women- and minority-owned firms was 20.4 percent of its $82 billion of fund assets. The emerging managers program had a much-broader impact in assisting women- and minority-owned firms. With more women- and minority-owned firms managing its large investments, total allocations, investments, and commitments of funds increased from $13.8 billion to $16.8 billion.

On the federal level, the United States Government Accountability Office (GAO) released a study of how institutional investors can increase the number of minority- and-women asset managers they work with. Through these four key practices, diversity in asset management would be expected to increase:

  • Institutional investors must commit to being accountable for increasing opportunities for minority-and-women asset managers.
  • They must remove barriers in investment policies that prevent emerging managers and smaller firms from access to opportunities.
  • They must conduct outreach and programs that help minority and women asset managers have investment opportunities.
  • They must communicate priorities and expectations to investment staff and consultants to ensure goals are met.

DAMI’s Initiative to Track and Report

To continue paving the way for diversifying asset managers, DAMI released our first Investment Consulting Survey in late 2018. The survey, which draws from the responses of 11 of the largest investment consulting firms (ICs) in the U.S., shares key findings that demonstrate the serious need for greater diversity in the asset management sector, particularly within ICs, and in their searches for clients. For example, Blacks and Latinos each account for only 5.7 percent of all staff in ICs, which means they have nearly 13 times less representation than their white counterparts (73.7 percent).

Women are just as severely underrepresented. Not only do they account for only 36 percent of senior management in ICs, but they also represent less than 30 percent of consulting staff and 25 percent of ownership of ICs.

This fall, we will release a new survey that highlights the progress DAMI and its partners have made to diversify the industry. Until then, we are calling on investment offices, investment  consulting firms, and trustees alike to ponder what strategies and tactics they have in place to help us in our journey of transforming the culture of asset management and using more managers of color, ultimately leading to a more-equitable distribution of capital and greater performance.

Robert Raben is the Executive Director of the Diverse Asset Managers Initiative and the Founder and President of the Raben Group.

October 2019, 19-07