The capital allocation to asset management companies owned by women and minorities remains well below the allocation to other companies, according to a Knight Foundation report released on Tuesday.
The report found that the overall percentage of assets under management controlled by companies belonging to various groups was only 1.4%. “I was surprised that there wasn’t more change when we looked at assets under management,” said Josh Lerner, professor of investment banking at Harvard Business School and co-author of the report. . Institutional investor. “You certainly hear, for example, about various new black-owned venture capital funds. But when we looked at the AUM numbers, there wasn’t much change. This underlines that, even with the best of intentions, this is not an overnight or easy process.
The trend appears to be constant in most types of funds. The Knight Foundation calculated the percentage of US-based assets under management managed by hedge funds, mutual funds, and minority-owned private equity and real estate companies, and the results showed that the funds Mutuals have the lowest representation of invested capital, with minorities and women. owned companies managing only 0.4 percent and 0.6 percent of assets under management, respectively. Minority-owned and women-owned private equity firms recorded the highest percentage of assets under management, at 4.5% and 1.6%.
While mutual funds manage the lowest share of assets under management, the category also has the second highest percentage of miscellaneous owned companies, at 9.2%, just behind the 9.3% observed representation. in hedge funds. According to the authors, this dissonance suggests that “although there may be a relatively large number of minority-owned businesses, the size of these businesses (as measured by the AUM) is much smaller than that of their own. undiversified peers ”. They added that, for all asset classes, “the amount of capital managed by companies belonging to various groups is not proportional to the number of companies belonging to various groups.”
Of the four asset classes observed, real estate lagged both in terms of the percentage of businesses owned by minorities (1.8%) and the percentage owned by women (2.8%). ). Private equity, on the other hand, led all other categories in the percentage of businesses owned by women, at 7.2%, although it ranks third in terms of ownership. minority.
According to the authors, however, there were no statistically significant differences in performance between diversified and undiversified equity funds in all asset classes, a factor that is often used as an explanation for under-representation. Juan Martinez, vice president, chief financial officer and treasurer of the Knight Foundation, said he felt the low allocation figures for variously-owned businesses had more to do with seniority and size than the performance. It is often more convenient for asset owners to allocate capital to large managers with whom they have an established relationship, Martinez said.
“In financial services, relationships are essential and scale has an advantage,” he said. “So when you combine scale and seniority, it’s a formula [that gives] asset distributors and investors [a reason] Carry on [doing] the same thing over and over again. This [just] becomes more convenient for asset distributors of [work with] managers they already know. This lowers the risks of investment decisions, but does not focus on the desirability side of the equation.
“A guild system”
Martinez also said he believes the dearth of readily available data on diversity in asset management companies also poses a challenge for institutional investors who wish to invest in companies owned by diverse companies. Congresswoman Joyce Beatty, who sits as the 27th President of the Congressional Black Caucus, made the same point during a hearing of the Diversity, Equity and Inclusion Committee on Thursday. Just three days earlier, she and Congresswoman Maxine Waters released a Majority Staff report titled “Diversity and Inclusion: Empowering America’s Largest Investment Firms.” The report compiled and analyzed data on the diversity of the 28 largest asset managers in the country and found that only nine of the 28 companies that responded to the request provided data on female-owned asset managers. and to minorities with whom they worked.
“When I became chair of the very first Diversity and Inclusion Subcommittee, asset management was high on my priority list,” Beatty said at the hearing. “Not only because of [the] power, wealth, [and] jobs it creates, but also because the limited data available in this space suggests it was one of the poorest performers [when it came to] diversity and inclusion within the services sector of the financial sector.
As she later added: “I am a steadfast believer [that] what is not counted cannot be measured.
In the report, 21 of 28 companies indicated that the data they provided on diversity was actual numbers rather than estimates. “Despite public commitments to racial equity, the diversity and inclusion of investment firms did not increase substantially between 2019 and 2020,” the authors wrote. “For example, people of color made up 16.6% of the executive workforce in 2019 and 17.6% of the executive workforce in 2020, an increase of just one percentage point. Above all, [in 2019] only 3 percent of managers in investment management firms were black. In 2020, that number rose to 3.4%, an increase of less than half a percentage point. ”
Martinez and Lerner both said owners and asset managers need to put more emphasis on recruiting and retaining diverse talent. “The investment business is really a guild system,” Martinez said. “You learn by [watching] who you work for and what is their approach. This forms the basis of your investment thesis, and you grow from there. If you don’t get these opportunities early on, you probably aren’t going to get them later.
Many large asset managers, such as Sixth Street, PGIM, BNY Mellon, and Fidelity, offer career development programs for women and minority talent. For example, in November, Sixth Street introduced a summer scholarship that prioritizes sophomores who identify as female, black, African American, Hispanic, Latin American, and / or Native American. The scholarship, which begins next year, will focus on developing skills in the area of investing.
Lerner said he supports these types of programs, but he has reservations about whether they will work as solutions to widespread diversity issues. He said companies need to focus on retention if these programs are to be effective in alleviating the pipeline problem. “We know there have been efforts to do this on Wall Street and elsewhere, [but] in many cases it seems that in [just] a few years they ran out of steam, ”Lerner said. “[It’s important to have] a sustained effort and [to realize] that it’s not just about getting people through the door, it’s about making sure they succeed in the years that follow.
Fostering retention also means that as the pipeline fueling diverse talent in asset management grows, companies have a responsibility to foster a welcoming and inclusive environment for employees. As previously reported by II, in February, asset management giant BlackRock failed in that tenure. In an article on the Medium blog site, Essma Bengabsia, a former BlackRock employee, recounted experiences of sexual harassment and discrimination based on her race, religion and gender within the company.
During the congressional committee hearing on Thursday, Ayanna Pressley, congresswoman from Massachusetts and vice-chair of the subcommittee, cited Bengabsia’s experience in a question to Michelle Gadsden-Williams, CEO and global head of diversity, equity and inclusion at BlackRock. Pressley also listed other cases of alleged racism and sexism at the company, including the sexual harassment of a black woman. “The problem is clearly systemic. Hiring women and people of color in a hostile environment from which they quickly leave traumatized is not the progress we are aiming for. In fact, it’s not progress at all, ”Pressley said.
Gadsden-Williams said the cases cited by Pressley were not welcome at BlackRock, and, in response to the allegations, the company instituted increased training for all employees, set up discussion forums and to raise concerns. concerns, and increased accountability measures for inclusiveness, particularly among senior managers. leaders and managers.
When Pressley asked Gadsden-Williams about data on the racial distribution of retention rates at the company, Gadsden said she did not have the data readily available.