Investing in Diversity

April 3, 2018 |
3 minute read

At Commonfund, we scour the globe to find investment managers that we believe have the ability to consistently produce excess returns (alpha) over and beyond their benchmark. But alpha alone is not enough. We also dig deeply into the sources of those returns to understand the underlying factors driving the strategy. Through our construction process we look to combine uncorrelated sources of return, thereby reducing overall portfolio risk. This search for uncorrelated alpha sources requires finding managers that are different from the crowd.

One byproduct of this effort has led to a history of investing in women and minority-owned managers in both Commonfund commingled programs as well as customized mandates, including within our hedge fund and private equity programs.[1] In recent years, however, this search for diverse managers has become a more formalized initiative. Drawing on a proprietary database of managers and a clearly defined institutional due diligence process, women and minority manager searches are now intentionally incorporated into every traditional equity and fixed income manager search at Commonfund.

For some clients, reasons for incorporating diverse managers in portfolios tend to start with efforts to create a positive social impact and to address socially-driven economic imbalances. Many of our endowment and foundation clients, as well as a number of public pensions have been vocal supporters of adding diverse managers on these grounds. But there are other compelling reasons to consider incorporating diverse managers in your portfolio.

The first of these is the simple benefit of diversity itself. Endowments and foundations have long understood the value of diversity of asset classes in their portfolios to help portfolios weather market vagaries. Many are also aware of a growing body of academic work that demonstrates the value of diversity in teams in generating smarter, more creative outcomes.[2] The implication for asset management is that investment teams that are diverse in background, gender and ethnicity also offer opportunities to generate better investment outcomes.

Secondly, embedded in most investor’s assumptions is that there is a performance cost to investing in diverse managers. However, the math suggests we should not ignore the performance opportunity women and minority firms offer. Although databases for diverse managers vary in quality and size across asset classes, a study commissioned by the Knight Foundation, and led by Josh Lerner at Harvard Business School and the Bella Research Group, demonstrates that there is no statistical difference in performance between diverse-owned firms and their peers.[3] Their study demonstrates that 20 percent or more of all women and minority owned firms fall in the top performance quartile of their respective investment strategy peers.


But there are challenges. In addition to the obvious difficulties faced in all manager searches, of finding those top quartile performers, the diverse manager universe forms only a small subset of the total managers within each asset class. With fewer managers to choose from, the sheer number of managers in the top quartile is necessarily limited.

Moreover, performance is not the only criteria for manager selection. Institutional operational standards are often cited as a barrier to investing in small or emerging managers and it is unquestionably true that the expense of establishing a strong operational platform is greater today than ever before, with more staff required to cope with additional regulatory requirements and client requests. Often the asset size of the manager itself is a hurdle and becomes a self-fulfilling prophecy when many consultants and investors judge these managers too risky due to limited size and resources.

We believe these challenges can be overcome. Concerted efforts to remain current with the investment universe and opportunities is paramount. If you do not look, you are certainly less likely to find. In addition, barring a minimum asset size capable of paying for basic operational services, high quality outsourcing services such as compliance, risk analytics and trading can help mitigate most of the operational hurdles to institutional investment.

Visit our Commonfund website today to learn more about responsible investing. 

[1] Minority investments generally include women and racial and ethnic minorities including African American, Latino, Asian and Native Americans and may also include veterans and people with disabilities.

[2] Herring, Cedric. 2009. “Does Diversity Pay?: Race, Gender, and the Business Case for Diversity.” American Sociological Review.

Orlando, Richard C. 2004. “Racial Diversity, Business Strategy and Firm Performance: A Resource-Based View.” Academy of Management Journal.

Phillips, Katherine W. 2014. “How Diversity Makes Us Smarter.” Scientific American.

[3] Lerner, Josh Harvard Business School and The Bella Research Group. 2017. Diverse Asset Management Project: Firm Assessment. The John S. And James L. Knight Foundation.


Caroline Greer


Caroline Greer

Managing Director

Stay connected with the Insights Blog

Popular Blog Posts

Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions...
Governance And Policy | Insights Blog

Endowment Management and the Three Primary Responsibilities of a Board

The fourth blog in the “Six Ps of Investment Stewardship” series addresses People, specifically how boards function within an organization. To learn more about the first four principles in the series...


Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.