In this episode our hosts speak with Hallie Label and Tyeshia Smith from Expect Equity, an initiative focused on supporting underrepresented public equity managers. They discuss the critical need for an expansive approach to talent in investment management, highlighting that only one percent of assets are managed by women and people of color, despite their equivalent performance. The conversation emphasizes the importance of shifting incentives and mindsets among allocators to foster inclusion and diversity in manager selection. Expect Equity aims to reset these incentives and engage with the community to promote accountability and financial sustainability.
Hello, everyone. This is George Suttles, executive director of Commonfund Institute. And I'm Amanda Novello, senior policy and research analyst at Commonfund Institute. And this is Espresso Chats, a podcast by Commonfund Institute, where we deliver short, strong shots of governance and leadership insight. Last episode, we spoke with Tim Yates about the state of higher education. Please go to our website to listen to that afterward. Commonfund works with organizations across the endowment and foundation space to promote learning and best practices and investment stewardship. And today, we are thrilled to be joined by Hallie Label, founder and CEO, and Tyeshia Smith, chief strategy officer at Expect Equity. We've got our coffee, espresso, what have you. We're excited, and we know this time is going to fly. So let's just jump right in. Hallie, Tyeshia, welcome. Hallie, let's start with you. Tell us about Expect Equity and the work that your organization does. Well, you, George. First of all, I just want to thank you and Amanda for including us in this discussion. We're honored to have been invited. Expect Equity has an innovative fund structure that enables us to incubate underrepresented public equity managers. They get three years to invest and build a track record and to develop relationships with institutional LPs with a hope and expectation that at the end of three years, they launch independent firms and at scale funds. So we have a single goal, which is to catalyze the launch of firms run and owned by underrepresented managers at scale. Ty joined us in early twenty twenty five as our chief strategy officer. And Ty, why don't you give a little bit of your background and why you joined us? Yeah. So thanks, Hallie. And I go by Tyeshia or Chat Ty, especially amongst friends, so please feel free to call me Ty for this conversation. But I have a little bit of a traditional operator background. Spent many years in strategy and operations across a variety of industries from nonprofit, ed tech, then big tech financial services, and now most recently asset manager asset management. However, I think there's a common through line throughout my career, which is building infrastructure platforms and capacity for those doing the work. So joining Expect Equity was a great fit. It was a great fit because not only Hallie and I are very values aligned, but I really wanted to be a part of supporting the growth of such an innovative solution like Expect Equity. So it's been, I was gonna say it's been chemistry ever since, but I think it was kinda strong. But it's been great work since joining the Expect Equity team. Thank you both. Hallie, wanna circle back with you. Can you share how this work has changed or anything that you all are facing that's specific to this political and economic climate? So we think about our work as taking an expansive approach to talent. And I certainly think that taking an expansive approach to talent is very apolitical. We seek excellence as do many others. And that doesn't change based on the party that occupies the White House or Congress. So the solution that we've come up with at Expect Equity, we think is innovative and tries to lower barriers to enable allocators to participate in solving what's been a very intractable problem over many, many years. And specifically those barriers that we try to lower are, you can mitigate investment risk through position size, our incubator funds are set up to accept very small capital commitments from institutional investors, and you can mitigate business risk through high quality infrastructure build. We've built infrastructure that we believe is common at funds many times our size. So I think for anybody who is in a role as a fiduciary of an endowed pool of capital, they should seek an expansive approach to talent in search of higher returns. And we've tried to develop something innovative to bring more talent into the fold that institutional allocators can diligence and consider. Thanks, Hallie. Related to that, I want to focus in on a key macro issue that hopefully we can bring to the ground level here for listeners. So, context, we know from the Knight Foundation and other analysis that only a little over one percent of total assets under management in the US is covered by firms owned by women and people of color. But at the same time, women and people of color on average generate investment performance found to be equivalent to other managers. We also know from common funds benchmark studies that there's been some movement among institutional investors looking to benefit from inclusive investment talent. So, from your experience, what is the key challenge or set of challenges for asset owners trying to move the needle? Or on the flip side, how can institutional investors look to expand their opportunity set? So, Hallie, we can start with you, but would love both of your insights here. So I think the key challenge is actually that most people who work in manager selection roles, and I'll caveat and say that I'm generalizing, of course, are many exceptions to this, but by and large, most people who work in manager selection roles are not incented to truly take an expansive approach to talent. I think too many people in this industry endeavor maximize career risk adjusted returns as opposed to investment risk adjusted returns. And allocators and people in manager selection roles are human as we all are, and we can't expect them to be superhuman and we can't expect them to act in opposition to their own interests. So we see the core problem as the issue of who sets those incentives that lead to a behavior that drives them to over index to or be more likely to select those who seem to represent kind of templates of prior success, Those who are selected by other well regarded allocators, those who are access constrained. So these are a number of kind of criteria that some people assume are correlated with investment returns and perhaps at times they are correlated with investment returns, but certainly those practices exclude a lot of talent from the pipeline and materially in my opinion impact how capital allocation occurs on a meta level, on a broad level. So I think fundamentally this is a governance issue and a governance question and the people in trustee roles and investment committee roles need to actively reset the incentives on how people on their internal investment teams or at their OCIO firms are compensated. And right now I don't believe that those incentives in most cases encourage an expansive approach to talent, but to the contrary actually create unnecessary career risk for people who choose managers who are not sort of broadly selected by their peer group. It's really interesting that all key players in this space pride themselves on being looking for the next best solution, being innovative, trying to, like, turn every rock to make the right investment. But the how behind capital allocation has sort of lagged behind that. And it is not necessarily as highlighted or as talked about. And there are organizations that are moving into this space, regardless of asset class, kind of filling that need for more like creating a more robust pipeline. But the mindset shift that is required of allocators has lagged behind that. And I think that can be said in any asset class. And I think what we are seeing is this is a great opportunity for the next generation of allocators that are being a bit more forward thinking around what inclusion means when choosing manager talent. So I do think that there will be shifts in sort of generations to come. It's just that there needs to be some urgency around it. But I think what Hallie has described in terms of the challenge and incentives are agnostic of asset class, there needs to be some sort of mindset shifts that I know will will sort of happen as this next generation of allocators come into harnessing their power and sort of the next stage of what asset management could look like. I think the final thing I would add is that there are some organizations that have very successfully reset those incentives and are committed to taking an expansive approach to talent. And for some, I think that's led to a pickup in clients for those in the for profit world. And there's certainly a small, but increasingly influential and growing subset of foundations and nonprofits who are also very much do have a governance structure that recognizes the systemic challenge and has created a set of incentives for their investment teams that lead to an expansive approach to talent. And I think those people have a very different manager roster than those who don't. Hallie, Ty, what's really, really interesting is that fundamentally what it sounds like is that your, because you mentioned fiduciary duty and governance, it sounds like, and you all can correct me if I'm wrong, and you can push back if I'm misrepresenting this, but it sounds like fundamentally what you're saying is or what you're providing is an opportunity to be a more prudent investor and a more responsible fiduciary. You know, we can we can we can play around with nomenclature, but that's really the opportunity that you're providing is to say, hey, we're looking for talent and we're across asset classes, and we're looking for opportunities to, you know, to be responsible and prudent, you know, asset owners and investors. This is the work that we have to engage in. Does that resonate? Or am I just oversimplifying it? Or is that fundamentally sort of what we're actually It one hundred percent resonates. It one hundred percent resonates. But I think that at the core, I participated in the CFA program and I very specifically remember, I was issued mine in two thousand and one. And at that time we learned the prudent man rule. And then that has since been converted to the prudent investor rule. But the way people think about carrying out fiduciary duty in terms of being a prudent investor, think has been sort of collectively via protocol decided that that should mean choosing people that others like you choose, as opposed to doing things that are different and innovative. So when the definition of prudence doesn't necessarily lead towards maximizing long term risk adjusted investment returns, but rather leads to making choices that feel safe and comfortable because other people have made those choices. Like the construct is that the protection and risk aversion exists in being aligned with the group instead of being different from the group. Now, obviously there's human psychology behind that and there are reasons why people comfortable with that. And I am not a social scientist, that's not my area, but what you're saying completely resonates with me. And I think you're seeing this kind of intersection of human psychology, long term protocol. This is the way things have always been done. So this is the way we are comfortable doing them tomorrow, even though that doesn't necessarily lead to the best long term returns for these institutions in our view. And, George, how you described it is sort of the core attributes that we're currently seeing. Right? Because they are currently a small group of unwavering firms and organizations, regardless of climate, that are saying we are committed to inclusion because we are being prudent. We are focusing on talent. We are going to ensure that regardless of this manager being an emerging manager or someone that we deem as nontraditional, we are still going to look at them at within the main portfolio. You know, there are success stories around ensuring that there are very clear metrics across all managers for performance. So I I sorry. So I share all that to say what it resonates because we see it. We wanna see more of it, but we're currently seeing these success stories with those that are being more public with wanting to do what's best within their fiduciary responsibility. Ty, that's really interesting, and I want to sort of pull on that thread. Are there substantive success stories that may inspire listeners to think differently about their own practices that you might be able to share? Yeah. I'll dive more into the core attributes of those success stories that we have seen, because what I'm hearing is success stories from asset owners and asset allocators that are truly being committed to inclusion and being innovative in a space that thrives on innovation. So some of those core attributes are around what does it truly mean to consider all managers? Does it mean slicing out a niche portfolio for those clients that have asked for it or truly saying, nope, this is a talented, high quality manager. They should be in the main portfolio pool. Is it sourcing from all types of places when thinking about managers? So soft intros are the standard and are effective, but they should not be the sole or, if not, the top two that allocators are looking to when trying to build pipeline because there are so many partner organizations that are there wanting to provide opportunity for managers that don't necessarily fit within a specific check the box. And then lastly, I kind of touched a little bit on this, which is around those metrics. We at Expect Equity think a lot about how we hold ourselves accountable to the work that we are doing. And what we've seen in successful stories are allocators that are thinking about, well, what are the metrics that are going to essentially put our money where our mouth is? We say that we are truly aligned to this. Are we tracking that? Are we thinking about what's the AUM that we're allocating to emerging versus more mature managers? What does it look like when we have underperformance, and is that underperformance consistent across manager? Like, what are the questions that we are starting to ask? Those are some of the things that we have seen larger institutions say. This is what we are doing, and now we are truly now we are truly showing that we are values aligned across our organization and getting more robust managers within our selection process. I wanna pose this question to you. What is exciting right now about Expect Equity's work, the role of your organization, and and and what are you seeing in the field more broadly? What positive movement are you seeing in the field more broadly that's exciting to you? One thing that I am excited about for Expect Equity is to be out there and meet all of the individuals that are in our ecosystem. We we we've met so many so far, but I I share that to say if you see us out in the field, if you see us out in the conferences, etcetera, please do please do join in the on the conversation. And we are learners, and we know that we aren't the only ones doing this work. So, yeah, what any ways that we can support sort of moving the needle on more capital allocation to asset managers of all backgrounds. Yeah. Tune in. Awesome. And Amanda and I can attest to the fact that Hallie and Tyeshia are not only savvy investors, but they are delightful individuals to converse and interact with. So I would take them up on that offer. If you see them at a conference or a convening, come up to them, say hello. They are wonderful. Hallie, Tyeshia, thank you both so much for coming on coming on and joining us. Really, really appreciate it. Amanda, as always, you were fantastic. And as for me, I did my best. If you liked this conversation and you want to hear more from leaders in the field, visit www.commonfund.org/espressochats to view the full playlist and subscribe on your preferred podcast platform. See you next episode. Bye.
View the full playlist and subscription options for this podcast here.