Can diverse people managing investment portfolios deliver an edge in performance? A growing body of research shows that diverse managers—defined by gender, race, ethnicity or other characteristics—perform as well as, or better than, homogenous teams. At Commonfund Forum 2022, a panel of three managers discussed the value diverse teams deliver to their investment strategies.
The managers were: Machel Allen, President and CIO, Metis Global Partners; Pooja Malik, Partner, Nipun Capital; and Arthur Young, Portfolio Manager and Managing Partner, Tensile Capital Management. The discussion was moderated by Betsy Wilson, Director, Commonfund Asset Management.
The following excerpts capture the essence of the discussion in terms of 1) the strategies each manager pursues and 2) how team diversity enhances the ability to implement their differentiated approaches.
Diversified by design
Wilson: We have three very different strategies represented by each of you. Tell us about them. Let’s start with you, Arthur.
Young: Our strategy is what we call opportunistic value, differentiated by a private equity approach to execute the strategy. We construct a portfolio that’s very concentrated—about eight to 12 companies comprise 90 percent of invested capital—and we invest with a long-term horizon of three to five years. We conduct our own proprietary research and due diligence and we get active with management teams depending on the particular situation. What enables us to do that is not only the research team we’ve put together but also our limited partner base because we have a Series A structure of public-only investing and we have a Series B that invests in both public and private equity. That means we can invest in a public equity portfolio while also investing in one-off private equity deals. That also means there’s a competition for capital and every idea has to stand on its own not only against the public markets but also what we can do in the private markets.
Malik: We focus on emerging markets equities through three strategies—market-neutral, long-only and small cap. We are a data-driven systematic manager; research across our strategies is shared and we dive deep for data in each of the 27 emerging markets in which we invest. Our philosophy is similar across all these countries but the data sets we develop, how we measure fundamentals and the indicators we use in each market are different. So, our strategy looks very different from the benchmark. From an investment philosophy perspective, our view is that in the long run prices are anchored by fundamentals; they don’t track fundamentals but they are anchored in fundamentals. In the short term, however, investment sentiment matters. We try to model long-term fundamentals and short-term sentiment. What’s really unique about our strategy is that it is designed to provide downside protection but pursue alpha through stock selection, and that makes us unique in the quant space. We manage a robust portfolio that is high Sharpe ratio and designed to outperform the market over a full business cycle while providing downside protection in off years and active stock selection in good years.
Allen: We have actually coined a phrase, “Bias-averse value investing.” It’s meant to exemplify what we do and it’s informed by a best of both worlds approach. I spent my first 20 years in traditional deep value shops and so when we were building our investment process what we were trying to attain was all of that valuation knowledge and insight while carving out the Achilles heel of any process where there’s people involved, and that is behavioral bias. Hence, the best of both worlds: You take a valuation-driven approach and deploy it in a systematic, bias-averse process. Ours is a “go anywhere” approach—we invest in countries around the world up and down the market cap spectrum. We use our valuation expertise to pick the best stocks in various “value clusters.” That term is the driving concept behind “the value premium,” which essentially posits that if you invest in inexpensive stocks and hold them over time they will outperform expensive stocks.
The diversity dividend
Wilson: Let’s try to connect diverse teams to your ability to implement the strategies you just described. What do you find to be the value diversity delivers to your portfolios? Poojah, we’ll ask you to begin.
Malik: Our competitive edge comes from ideas. There’s a lot of data out there and sooner or later we all have access to the same data. That’s why for us the edge comes from ideas and ideas come from talent. Diverse talent comprises our team and there are two reasons for that. One, people hire from their networks. You hire people you know, you hire people you trust. The fact that I have a different network from most quant firms has enabled me to build a team that is high quality and not the same as everyone else’s. Two, what I have learned from my own career is that it can be hard for people to spot leaders in a company that looks different from them. That made a difference in my own career when I was up for promotion and someone on the committee said they didn’t know who I was despite the fact that I ran an $8 billion portfolio that no one wanted to touch until I turned it around in three years. People are used to defining leadership in a certain way and a lot of it has to do with visibility. Being a diverse leader, I have a different way of spotting talent. That’s a competitive edge for me.
Allen: My approach is holistic. Spending the first 20 years of my career in what I would consider a very homogenous environment, visibility was a challenge, just as Pooja said. I didn’t set out to build a diverse firm. But because of my training and background—value oriented but also behavioral finance oriented—I had a very strong conviction about decision-making bodies, how they work, and their strengths and weaknesses. I believe having a different set of lenses in the room optimizes your decision-making apparatus. And that is everything in decision-making. Moreover, it transcends all human activities, not just investing. To Pooja’s point about networks, I have tried to override my own biases and be intentional in my effort to learn about other networks. Because we really value true diversity—age, sex, ethnicity, socio-economic, cultural … however you define it.
Young: Our private equity approach is very due diligence-oriented and diversity is a fundamental part of that. Just from a diversity perspective, over half our firm would qualify. But it goes deeper than that because we have a huge advantage from a research perspective. For example, I have a partner who grew up on a farm in Illinois; he had 25 people in his high school graduating class. Our senior-most analyst’s father emigrated here and worked as a garage mechanic. He went to Harvard but knowledge gained through his father’s work was instrumental in our research into the auto parts industry. I believe diversity is an advantage regardless, but in an industry like ours that is so research-intensive understanding as many different viewpoints on a stock before investing is critical and we find it is a difference-maker for us.