I consider myself a fiscal conservative and a social liberal. As an African-American, I have long been sensitive to issues like racial and gender equality. The last 12 months have been polarizing in America, from the #MeToo movement to tiki torch-bearing white nationalists to Black Lives Matter and the NFL national anthem protests. Our national melting pot is looking like anything but.
In the past few months my firm has responded to a few competitive RFP processes with foundations and endowments. What’s striking is that we’ve encountered two unrelated organizations that had a diversity statement within their investment policy statements. These organizations have taken a stand when it comes to investing in strategies and funds owned by women and minorities. I believe this is a trend that more financial advisors need to be prepared to discuss with their clients.
When I work with a new client, I always build a custom asset allocation, but I tend to use the same underlying investment vehicles. While this makes my life as an advisor easier, it is also lazy. I invest in funds and vehicles that I know fairly well, and I have grown comfortable with them over time. Until these recent RFPs forced me to search for firms that were owned by women and minorities, it never occurred to me that racial and gender equality was an issue to consider in portfolio construction.
QuoteTwo clients we're working with had a diversity statement within their investment policy statements. I believe this is a trend that more financial advisors need to be prepared to discuss with their clients.
Only 1.1% of the $71.4 trillion asset management industry is being managed by firms owned by women and minorities, according to a report funded by the John S. and James L. Knight Foundation. That report also found that 25% of women-owned and 28% of minority-owned mutual funds perform in the top quartile of their peer groups on average. In other words, these funds tend to perform as well as the industry average. With no statistical difference in the performance of women-owned and minority-owned funds, it is perplexing why they are not managing more money.
After conducting its research, the Knight Foundation moved $472 million, or 22% of its endowment into funds managed by women and minorities. Others have made similar moves. New York currently has placed $11 billion or 6% of its pension portfolio with minority and women-owned managers. Meanwhile, the state of Illinois has an aspirational goal that 20% of its $13.9 billion pension fund will be be managed by minorities, women and individuals with disabilities.
So why do advisors ignore women-owned and minority-owned funds?
First, the money management industry does not make it easy to screen for or identify minority and women-owned asset managers. Most commercial databases do not track this data. In preparing its report, the Knight Foundation had to cobble its lists together using a variety of sources and data compiled by organizations like the National Association of Investment Companies, the Diverse Asset Managers Initiative and the Robert Toigo Foundation. They also found valuable data through the eVestment database.
Second, we tend to favor fund firms that are either household names, or firms that have proactive wholesalers who are in regular communication with us. And when we screen for new investments, we often omit smaller firms and unrecognizable names.
In looking at my own client portfolios, I was surprised to learn that only 1 out of the 30 or so investment vehicles I track and recommend was managed by a person of color. This is despite my firm having plenty of clients who are women and minorities, and being an ethnic minority myself. I don’t think I’m a racist or a sexist, but you could not tell by looking at my typical portfolio.
Thankfully one of the new clients we landed in the RFP process forced me to change my approach. Through intentionally looking for diverse managers, I was pleasantly surprised to find a fund manager in Baltimore whose small cap growth product had a substantially better track record than the one I had been using previously. I also found a strong bond manager. By the time I was done with my search, I was able to find a diverse manager for every asset class in the client’s portfolio. And what’s better, we did so without sacrificing manager quality or potential returns.
I am not saying that all advisors need to run out and start adding these managers to their portfolios. But I am preparing you for what’s to come — more and more clients, from individuals to foundations, will be asking us questions about the diversity of their investment managers. This is not an issue where we can continue to be uneducated or caught flat-footed.