How to Invest in Diverse Managers

A U.S. capitalist system where approximately one percent of all capital is managed by women and people of color, who make up 70 percent of the population, perpetuates and increases inequality and drags down our whole economy.¹

Recently, Ford Foundation and Commonfund Institute hosted a discussion with peers who are at the forefront of the investing in diverse managers effort. The panel was moderated by George Suttles, Executive Director, Commonfund Institute and a member of the Commonfund Diversity, Equity and Inclusion office, with Ford Foundation trustee Gaby Sulzberger, Rockefeller Brothers Fund trustee Valerie Rockefeller, and trustee and interim CEO of the Nathan Cummings Foundation Rey Ramsey.

During this virtual session, panelists shared the experiences of their own institutions allocating capital to diverse managers, the benefits of investing in diverse managers, challenges they've encountered and resources they've found helpful.

Watch the video below to view highlights from the conversation and read on for key takeaways.

Leadership Is Needed

Without a commitment from leadership—the board/investment committee—your institution will make little progress when it comes to investing in diverse managers. It starts with the board, in partnership with senior staff and any third-party investment partners. No matter the investment management model, it takes leadership to develop and implement a strategy to add diverse managers into your portfolio. In addition, the correlation between a lack of diverse boards, investment consultants, and OCIO firms² —all of which make and influence institutional investment decisions—sheds some light on the importance of diverse leadership. Committed, diverse board and investment management leadership widens the aperture and can provide a more inclusive investment approach.

Convert Interest to Investment Action

There seems to be a growing interest in investing in diverse managers, but it has been slow to translate into significant increases in capital allocations to these managers. Even if there is willingness, it takes planning and implementation. During several convenings, conversations and surveys on diverse managers, it is apparent that the interest is there. In a 2020 Aon Institutional Investor Survey on Diverse Manager initiatives, more than 50 percent of institutions surveyed noted “some level of interest and increased engagement with diverse managers.”³ Increased interest and engagement are great, but they are not the same as actually investing. Leadership, coupled with action, is what is needed.

To read an extensive report that chronicles how Nathan Cummings Foundation has turned interest to action, please review their recently released report: Values Proposition: How and Why we Transformed Our Investment Model to Align Our Capital with Our Mission.

Do the Work

Ask the questions: Boards and investment committees who hire investment consultants or OCIO providers should ask more questions about how they are sourcing and allocating to diverse managers in their portfolios. In response to these questions, providers will, in turn, have to ask questions of fund managers regarding their own diversity practices. Remember, as much as investment consultants and OCIO providers are strategic partners, they are still service providers. Additionally, as much as fund managers are tasked with generating returns, they need investors to allocate capital to them. If your nonprofit institution is serious about investing in diverse managers, ask your investment management provider to reexamine their due diligence and risk management frameworks to help facilitate when and how they are going to increase the number of diverse managers in the portfolio.⁴ If after a certain period of time they cannot come up with a solution, find a partner that can.

Take the Time: In order to successfully allocate capital to diverse managers, you have to put in the time. Although the universe of diverse managers continues to expand, it is less a matter of supply (access to diverse managers across asset classes) and more about taking the time to identify and appropriately diligence them. Many who lag in this effort often state “if it isn’t broke, don’t fix it”, meaning that if traditional due diligence processes are in place and the portfolio is generating positive returns without diverse managers, why go through all the trouble to include them in the portfolio. Recent data shows that incorporating diverse managers into portfolios increases returns⁵, so taking the time is well worth it.

Consider setting targets: Once you develop and implement an investment strategy that includes diverse managers, the next step is to set up an evaluative framework to measure success. Some institutions set a percentage target while others set allocation targets. For example, the Rockefeller Brothers Fund recently set a new goal to invest 25 percent of its endowment holdings with firms majority-owned by women and/or people of color; as of December 2019, they have reached approximately 12 percent of their goal.⁶ Another example in the pension space is the Chicago Teacher’s Pension Fund, which in 2009 set, and continue to exceed, quantifiable goals to invest in diverse managers.⁷ Defining what success means for your institution and setting some targets, even if they are broad, significantly increases the likelihood for success and more importantly, accountability. Each institution should set sensible targets that are appropriate for their size, approach, and overall diverse manager strategy.

Conclusion

This discussion, although rich with insights, did not cover every consideration regarding this topic. Ultimately, a shift in mindset, from investing in diverse managers as a “trade-off” to investing in them as opportunities for growth and increased returns will be the primary driver of significant progress. Institutions that have the leadership, and racial and gender equity in their mission’s DNA have and will continue to fuel this movement and the hope is that the number of these institutions continues to increase.

Endnotes and Resources:

Mission Investors Exchange, Diversity in Asset Management: Research and Practice

Intentional Endowments Network (IEN): Invest in Diverse Managers Resource Library

Inside Higher Ed, “New Push to Diversify Endowments and Their Managers”, Emma Whitford, August 2020

Markets Media, “From the Markets: Investment Consultants Still Mostly White and Male”, Results reported from the 3rd Annual Investment Consultant Survey”, Diverse Asset Managers Initiative, 2020

Diverse Asset Managers Initiative (DAMI)

Fortune, “The Investment industry claims to support diversity, but the numbers don’t add up”, Robert Raben, 2020