Allocators aiming to work with more diverse managers can benefit from choosing their advisors wisely.
According to Brian O’Neil, the former chief investment officer of the Robert Wood Johnson Foundation, investment committees tend to be more focused on maximizing returns over other concerns, such as the representation of women and racial minorities among the managers with whom they work. O’Neil — whose position at the foundation was recently filled by filled by May Ng — shared his views on how allocators can overcome this dynamic at an April 20 webinar sponsored by the Diverse Asset Managers Initiative.
According to O’Neil, investing in diversity is like investing in any new asset class — and the best way to approach it is by intentionally seeking an advisor or consultant who has dedicated resources to focus on diversity, equity, and inclusion.
“I would say that if you’ve made a decision that you’re going to work with minority managers, you have to approach it as you do any other new area of investing, and you need to make sure that you get educated in this field,” he said. He said the RWJ Foundation did this by finding consultants who have connections with a diverse pool of talent and have expertise in addressing the lack of diversity in allocator portfolios.
For the first five years following the 2013 creation of its emerging manager program, the RWJ Foundation relied on advisors to conduct searches on diverse managers. “It helped us get started and get a feel for what diverse talent was out there,” O’Neil said.
Diverse managers in the private markets face more challenges raising capital compared to those in the public markets, O’Neil said. For one thing, the fundraising environment has become increasingly difficult for private market funds in general due to the “denominator effect,” a condition in which allocators are overweight private market assets due to their shrinking public portfolios.
But perhaps more important are the different dynamics in private markets, he said. Fundraising in private markets is more dependent on personal connections than it is in public markets, and diverse managers usually have less well-developed social networks.
The RWJ Foundation, for its part, was able to gradually reduce its dependence on consultants for the emerging manager program after it had developed its own network of managers led by women or racial minorities. “Over time, we did see the limits of the advisory relationship,” O’Neil said. “There were probably more managers in the fund than we would have chosen, because advisors wanted to make sure that if one manager didn’t do well, it wouldn’t affect the track record.”
However, O’Neil argued that advisors focused on DEI can still be a great help for allocators by expanding their reach to a diverse pool of talent. “It’s important for an organization to understand how you succeed in the new area,” he said. “If you can do it on your own, great. But I think you have to be honest with yourselves about what your skill sets are.”
