Fund managers’ race appears to play a role in whether they’re selected by asset allocators, such as pension funds, according to a new report.
The report, by Illumen Capital and a centre from Stanford University’s department of psychology, found racially diverse teams may face bigger barriers to advancement, even after they’ve established themselves as strong performers.
Mutual funds, hedge funds, real estate and private equity represent total assets under management of US$69.1 trillion globally, of which only 1.3 per cent is managed by women and people who are racially diverse, the report said.
Asset allocators have difficulty measuring the competence of racially diverse teams, the report said, while their judgment of racially homogenous teams’ competence is more heavily correlated with predictions about future performance.
As well, the report found racially diverse teams that perform well get less credit. Among strong-performing asset managers, allocators rated funds led by people who are white more favourably on investment skills, competence and social fit than firms led by people who are black.
When funds experience weaker performance levels, allocators are actually more likely to give racially diverse teams the benefit of the doubt, but this still doesn’t mean giving them more funding, the report found.
“I’ve observed investors leaving money on the table because they underestimate the value of funds managed by people of colour and women,” said Daryn Dodson, founder and managing director of Illumen Capital, in a press release. “But many of these investors did not seem to harbour conscious prejudices or even notice their biased behaviour. This leads me to believe the problem can be addressed, but we must first clearly define why these issues exist. This is true for professionals in the impact investing space too, who, seeking to improve society and achieve returns can never fully reach their goals without addressing racial bias.”
The report concluded that the underrepresentation of people who are racially diverse in the investment world isn’t just a talent pipeline problem, which is a frequently cited cause, and that racial bias plays a role.
And this can be a fiduciary breach, it noted. “Taken together, these findings suggest asset allocators may not realize that they are missing opportunities for higher financial returns by undervaluing high-performing funds led by people of colour or by overvaluing white-male–led funds.
“In fact, asset allocators might be violating their fiduciary obligations (i.e., to generate the highest possible returns for their investors) by not investing in funds led by people of colour that could produce returns as high or higher than white-male–led funds. Consequently, racial bias could potentially result not only in the unfair treatment of fund managers of colour and their grantees, but also in leaving significant financial opportunities on the table, thus hurting the entire financial ecosystem.”
Among its recommendations, the report said asset allocators should work to populate the pipeline of diverse managers and support those who are already in the investing space.
“Organizations could train asset allocators to overcome their biases by revamping their investment criteria and strategies and ensuring they are knowledgeable about the success of firms led by people of color,” it noted. “Diversity, in fact, is not only a moral obligation, it is a fiduciary one — leading to fewer losses and better performance.”