Capital allocation to women- and minority-owned asset management firms remains far lower than allocation to other firms, according to a Knight Foundation report released Tuesday.
The report found that the overall percentage of assets under management controlled by diverse-owned firms was only 1.4 percent. “I was surprised that there wasn’t more of a change when we looked at assets under management,” Josh Lerner, professor of investment banking at Harvard Business School and a co-author of the report, told Institutional Investor. “You certainly hear, for instance, about various new Black-owned venture capital funds. But when we looked at the AUM figures, there’s not been a huge amount of change. It underscores that, even with the best intentions, this isn’t an overnight or easy process.”
The trend appears to be consistent across most fund types. The Knight Foundation calculated the percentage of U.S.-based AUM managed by minority-owned hedge funds, mutual funds and private equity and real estate firms, and the results showed that mutual funds have the lowest representation of capital invested, with minority- and women-owned firms managing just 0.4 percent and 0.6 percent of AUM, respectively. Minority-owned and women-owned firms in private equity saw the highest percentage of AUM, at 4.5 percent and 1.6 percent.
While mutual funds manage the lowest share of AUM, the category also boasts the second-highest percentage of diverse-owned firms, at 9.2 percent, just behind the 9.3 percent representation seen at hedge funds. According to the authors, this dissonance suggests that “although there may be a relatively large number of minority-owned firms, the size of these firms (as measured by AUM) is much smaller than their non-diverse-owned peers.” They added that, across asset classes, “the amount of capital managed by diverse-owned firms is not proportional to the number of diverse-owned firms.”
Out of the four asset classes observed, real estate lagged the field in both the percentage of firms owned by minorities (1.8 percent) and the percentage owned by women (2.8 percent). Private equity, on the other hand, led all other categories when it came to the percentage of women-owned firms, at 7.2 percent, although it came in third in minority ownership.
According to the authors, however, there were no statistically significant differences in performance between diverse- and non-diverse-owned funds across asset classes, a factor that is often used as an explanation for the underrepresentation. Juan Martinez, vice president, chief financial officer, and treasurer of the Knight Foundation, said he feels that the low allocation figures for diverse-owned firms have more to do with incumbency and size than with performance. It’s often more convenient for asset owners to allocate capital to large managers with whom they have an established relationship, Martinez said.
“In the financial services space, relationships are key and scale has an advantage,” he said. “So when you combine scale and incumbency, it’s a formula [that gives] asset allocators and investors [a reason] to continue [doing] the same thing over and over again. It [just] becomes more convenient for asset allocators to [work with] managers they already know. It de-risks investment decisions, but it doesn’t focus on the opportunity side of the equation.”
‘A Guild System’
Martinez also said he feels that the dearth of readily available data on diversity at asset management firms also poses a challenge for institutional investors hoping to invest in diverse-owned firms. Congresswoman Joyce Beatty, who sits as the 27th chair of the Congressional Black Caucus, raised the same point in a committee hearing on diversity, equity, and inclusion on Thursday. Just three days earlier, she and Congresswoman Maxine Waters released a majority staff report entitled, “Diversity and Inclusion: Holding America’s Largest Investment Firms Accountable.” The report compiled and analyzed diversity data from the country’s 28 largest asset managers and found that only nine of the 28 firms that responded to the request provided data on the women- and minority-owned asset managers with whom they were working.
“When I became chair of the first-ever subcommittee of diversity and inclusion, asset management was high on my list of priorities,” Beatty said in the hearing. “Not only because of [the] power, wealth, [and] jobs it creates, but also because the limited data available in this space suggested it was one of the worst performers [when it came to] diversity and inclusion within the financial sector services sector.”
As she later added: “I’m a firm believer [that] what doesn’t get counted doesn’t get measured.”
In the report, 21 of the 28 firms indicated that the data they provided on diversity were actual numbers rather than estimates. “Despite public racial equity commitments, 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 percent of the executive workforce in 2019 and 17.6 percent of the executive workforce in 2020, an increase of only one percentage point. Importantly, [in 2019] only 3 percent of executives in investment management firms were Black. In 2020, this number rose to 3.4 percent, less than half a percentage point increase.”
Martinez and Lerner both said that asset owners and managers need to place more emphasis on recruiting and retaining diverse talent. “The investment field is really a guild system,” Martinez said. “You learn by [watching] who you work for and what their approach is. That forms the basis of your investment thesis, and you grow from there. If you’re not getting those opportunities early on, you’re probably not going to get them later on.”
Many large asset managers, such as PGIM, BNY Mellon, and Fidelity, offer career development programs for women and minority talent. Lerner said that he supports these types of programs, but he has reservations about whether they’ll work as solutions to widespread diversity issues. He said firms must focus on retention if these programs are to be effective at mitigating 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’ve run 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, but about making sure they’re successful in the years afterwards.”
Promoting retention also means that as the pipeline feeding diverse talent into asset management expands, firms have a responsibility to foster a hospitable and inclusive environment for employees. As previously reported by II, in February, the asset management giant BlackRock failed in this mandate. In a post to blog site Medium, Essma Bengabsia, a former BlackRock employee, recounted experiences of sexual harassment and discrimination based on her race, religion, and gender at the firm.
In the congressional committee hearing on Thursday, Ayanna Pressley, a Massachusetts congresswoman and vice chair of the subcommittee, cited Bengabsia’s experience in a question to Michelle Gadsden-Williams, managing director and global head of diversity, equity, and inclusion at BlackRock. Pressley also listed other instances of alleged racism and sexism at the firm, including the sexual harassment of a Black woman. “The problem is clearly a systemic one. Hiring women and people of color into a hostile environment where they promptly leave traumatized is not the progress we’re aiming for. In fact, it’s not progress at all,” Pressley said.
Gadsden-Williams said the instances Pressley cited were not welcome at BlackRock, and, in response to the allegations, the firm instituted increased training for all employees, implemented forums for discussion and to raise concerns, and increased accountability measures for inclusivity, particularly among senior leadership and managers.
When Pressley asked Gadsden-Williams about data on the racial breakdown of retention rates at the firm, Gadsden said she did not have the data readily available.
