How do the largest charitable foundations rate on manager diversity? A new study from the Knight Foundation offers a glimpse inside the portfolios of some of the 50 biggest foundations in the U.S.
The study, conducted by the Global Economics Group, seeks to analyze what percentage of each foundation’s assets are invested with women- or minority-owned asset management firms. The results include 26 charitable foundations ranging in size from the $51.8 billion Bill & Melinda Gates Foundation to the $2.3 billion Richard King Mellon Foundation.
Twenty-four other large foundations either declined to participate, did not have sufficient public data for analysis, or were deemed irrelevant to the study. The $11.7 billion Lilly Endowment, for example, was excluded because it is primarily invested in Eli Lilly and Co.’s stock.
Out of the participating foundations, 16 had more than 10 percent of their analyzed assets invested with diversely-owned managers. Three had over a quarter of their analyzed assets managed by women- or minority-owned firms, including the Knight Foundation, Casey Family Programs, and Robert Wood Johnson Foundation.
In total, the Knight Foundation found that 13.5 percent of analyzed assets were invested with diversely-owned asset management firms.
“I’m very encouraged by these numbers,” Knight Foundation's chief financial officer Juan Martinez said by phone. “Only 1 percent of assets under management in the entire field are run by women- or diverse-owned firms. These [foundations] have been done extra work, extra diligence to try to identify great diverse managers.”
Still, not all the foundations analyzed by the Knight Foundation had such diverse portfolios. Four — the Tulsa Community Foundation and attached George Kaiser Family Foundation, Robert W. Woodruff Foundation, Wyss Foundation, and Ewing Marion Kauffman Foundation — were found to have no assets managed by diversely-owned firms. In addition, the largest fund on the list, the Bill and Melinda Gates Foundation, only had 3.4 percent of analyzed assets managed by women- or minority-owned firms.
The analyzed assets did not account for the foundations’ entire portfolios — only U.S. managers that were either publicly reported in tax documents or provided for the purpose of the study. Some foundations were found to have limited diversity among their investment managers because they do not use many external active managers. The Gates Foundation, for example, manages the vast majority of its $51.8 billion portfolio in-house, so the study only looks at about 2 percent of the total portfolio. The Robert W. Woodruff Foundation, meanwhile, said it favored passive strategies over active managers.
Another example is the $8.8 billion Silicon Valley Community Foundation. As a community foundation, the SVCF is made up of “over 2,000 different funds,” some of which are controlled by separate legal entities and boards, according to Bert Feuss, its senior vice president of investments. The total fund also includes donations that were made in the form of investments that are in the process of being liquidated.
This means that in the Knight Foundation’s study, just 2 percent of the Silicon Valley Community Foundation’s analyzed assets were found to be managed by diverse-owned firms. However, when the scope is narrowed to just the assets overseen by the SVCF’s investment manager, the percentage improves to 18.4 percent.
“We think that’s the more meaningful baseline,” Feuss said. “If you use the total assets of a community foundation, it brings in a lot of other assets and noise.”
According to Feuss, the SVCF made diversity and inclusion a priority within its portfolio starting in 2011, when the foundation determined that its managers did not reflect the community that the SVCF served. “It was hard to believe that there weren’t qualified and talented women-owned firms and minority-owned firms,” Feuss said.
The foundation then began working with its outsourced-chief investor officer, Colonial Consulting, to engage with more diverse managers and start reporting on how many diverse-owned firms were met with and hired.
For an allocator like the Carnegie Corp., which relies on internal investment staff rather than outsourcing, improving manager diversity can require a commitment on the part of the team to meet with more women- and minority-owned firms — even managers that aren’t necessarily a good fit for the portfolio, according to CIO Kim Lew.
“We’ve taken a very active approach in meeting with any diverse manager that comes to us,” Lew said by phone. “Many may not be ready for capital from Carnegie, but we want to make sure they think about how to build their organization in a way that we could eventually support them. We build these relationships over time, and we think it bears fruit.”
For the first few years, Lew held herself personally responsible for taking meetings with diversely-owned firms. Then about a year and a half ago, managing director Alisa Mall took over as the head of Carnegie Corp.’s diversity and inclusion efforts. In addition to conducting the initial meetings with women- and minority-owned firms, which involve vetting and potentially recommending those managers to her colleagues for further consideration, Mall has led new initiatives to connect other limited partners with high-quality diversely-owned firms across different asset classes.
“We’ve started putting together these events — we call them speed dating,” Mall says. “The format allows each manager to have small group meetings for about 20 minutes with each of the investors. Often managers just struggle to get meetings and access to LPs, and this is a way to ensure they get a face-to-face introduction and make a connection. If the investors like them and think there’s a fit, they can follow up with them.”
It’s an initiative that does little to directly benefit Carnegie Corp. or its portfolio. But Mall said the fund “wanted to take a step toward a broader change.”
“Our dollars only go so far,” Mall added. “To affect any kind of outcome, we have to go beyond our institution.”
While the asset management industry as a whole remains very white and male, Mall said that diversity and inclusion has been “elevated in level of priority for investment management firms and investors in a meaningful way” over the last year or so — a trend that is captured in the result of the Knight Foundation’s new study, according to the foundation’s CFO.
“I think asset managers should look at this and say, ‘Wow, there is an opportunity here; there are customers who think this is an important issue,’” Martinez said. “Why not make it easier? Why not lower those barriers and make diversity your competitive advantage?”