While any single manager may over- or underperform, having more diverse managers in your portfolio “enables you to have many more ways to win,” according to W.K. Kellogg Foundation’s managing director of hedge funds and fixed income Reggie Sanders.

“I think diverse managers can outperform, but we found that a better question for us to ask is: Can diversity give you more ways to win? And for us, that’s an unequivocal yes,” Sanders said.

The remarks were made at the Allocator Collective’s anniversary celebration in New York this month. The event, which marked five years since the collective was founded in 2020 (originally under the name Institutional Allocators for Diversity, Equity, and Inclusion), included a panel on discussing sourcing and evaluating diverse managers (which includes firms owned by women and people of color).

Sanders told attendees that integrating investors’ diverse lived experiences into the manager selection process offers quantifiable, mathematical advantages. Plus, blind spots can be found in the portfolio and fixed.

“We don’t have a target for diverse managers, but we have a way in which we can organically drive up the allocations that we make to firms owned by women and people of color,” Sanders said. “We try to have the funnel as wide as possible, so we can have as many ways to win as possible.”

The philanthropic organization came up with an “allocator bias scorecard” that has about 25-plus different cognitive mental models that help prevent the investment team from overlooking an experience or perspective that could lead to better returns for the more than $9 billion portfolio. 

“No one experience is better than another but having an unwarranted bias against any experience just because it has been historically underrepresented can prevent you from having a better portfolio,” Sanders said. 

As he explained, performance is usually compared to a benchmark “that only has a handful of ways to win." For fixed income, the Bloomberg Aggregate Bond Index has only a few drivers of return (duration, credit spread, yield curve shifts). By factoring the interconnections between them, those drivers lead to just six different ways the benchmark can win. But by leveraging its scorecard's 25-plus investment mental models and factoring in those interconnections, the foundation can generate "300 potential ways of winning."

“If we do not outperform with a 50-to-1 advantage, diversity is not the problem; it is our inability to leverage diversity to win that is the problem,” he said.

Identifying otherwise unrecognized cognitive biases can make a demonstrable impact on portfolios. For example, W.K. Kellogg found that a lack of cognitive diversity can lead to overrepresenting value and underrepresenting momentum.

“Our approach to optimizing diversity in investment thought is based on leveraging how people from different backgrounds can experience the same world and the same market environments differently,” Sanders said. “Similar to how someone who grew up as a value investor can experience the same environment differently than someone who grew up as a momentum investor.”

Another panelist, Trinity Church CIO Meredith Jenkins, said her team has used W.K. Kellogg’s scorecard not just to benefit from more attractive returns but also as a risk management tool.

“We can also work with our managers for them to understand: Where are your blind spots? What might you be missing because you don’t have someone at the table who’s going to highlight a certain risk to you?” Jenkins said.