Features | September 5, 2019

Applying a racial lens to overcome persistent bias in investment management

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ImpactAlpha, Sept. 5 – Not even superior performance by investment managers of color, it seems,  dispels lingering racial bias in the allocation of capital by institutional investors. 

The latest Returns on Investment podcast took another look at the study from Illumen Capital and Stanford SPARQ, released last month, that found that biases, implicit or otherwise, actually increase the better fund managers of color perform.

That made me think back to “Investing in Racial Equity,” ImpactAlpha’s series with Living Cities. “Race-neutral efforts to boost economic opportunity have failed,” Living Cities’ Brinda Ganguly and Brian Nagendra wrote last year. “Going forward, organizations across sectors must deliberately incorporate a racial lens into their economic security efforts.”

The new study, involving 180 asset allocators, found a clear bias against funds led by high performing Black males, even when all other aspects of the hypothetical funds are identical.

The authors of the study said the results put to rest notions that the underrepresentation of fund managers to color was only a function of a problem in the “pipeline” of fund managers of color. Little more than 1% of more than $69 trillion in the assets of mutual funds, hedge funds, real estate and private equity funds is managed firms owned by women or people of color. The theory has long undergirded the range of “emerging manager” programs intended to help stand up first-time managers.

But the pipeline theory doesn’t explain why, in looking for high performance managers, capital allocators continue to invest in White and male-led teams, say the researchers. The capital allocators, they say, “may fall back on pattern-matching strategies and mitigate risk by sticking with familiar options.”

The better fund managers of color perform, the more bias they face

Stanford’s Ashby Monk, who helped design the study, said unchecked biases limit the available universe of funds. Asset owners who undervalue racially diverse high performers, or overvalue White ones, expose their portfolios to uncompensated risk and leave returns on the table.

That suggests stakeholders need to press those asset managers to check their biases. “A racial lens, like a gender lens, doesn’t mean you invest only in fund manager of color or funds led by women,” I argued in the podcast. “It means that you put a racial lens on your decision-making, so you make sure you’re checking your biases.”

Such “racial lens” investing is gaining adherents at the portfolio level. Pat Miguel Tomaino of Zevin Asset Management, a Boston-based investment advisor managing about $500 million in assets, has laid out a racial-lens investing manifesto. Zevin screens out companies that exploit minority and economically-disadvantaged communities, by profiting from mass incarceration, for example. Zevin has pressed companies like Starbucks and Target Corporation to disclose or develop so-called Fair Chance Hiring policies. 

McKinsey says firms with racial diversity have better than average returns. Dalberg has found tech firms could boost revenues by hundreds of millions of dollars with workforces that fully reflect the talent pool. Prudential Financial is among an increasing number of impact investors adopting a racial lens to address racial wealth gaps.

An illuminating example is Mayvenn, a hair-products platform that taps the distribution power of local stylists, particularly in Black neighborhoods. The venture was spotted Kesha Cash’s Impact America fund, and then raised funds from powerhouse venture capital firm Andreessen Horowitz.


“These white-male led funds hadn’t known there was a $5 billion market for hair extensions in the black community and that there were all these beauticians in parlors and salons in black neighborhoods that were a great distribution network for this thing that black women were willing to pay good money for,” I say in the podcast. “It was an example of seeing something that other people weren’t seeing because you had racially diverse managers.”

Can the same approach work in the selection of fund managers by asset allocators who sit at the top of the financial food chain? Roundtable regular Imogen Rose-Smith said it doesn’t go far enough. 

“The system is broken,” she says. “What do you have to do to get more capital flowing to women and minority firms? You have to tackle the system. Emerging manager programs didn’t work because they didn’t tackle the system.”

We’re talking about pattern-recognition and vested power structures,” she continued. “That’s what we need to address.”

Illumen’s Daryn Dodson has put bias reduction at the center of the investment thesis for the firm’s fund of funds. Illumen invests in White or Black fund managers targeting financial inclusion, education, health and wellness and cleantech and sustainability. Dodson then works with the managers to reduce racial bias over 10 years in key decision-making areas: investment processes, hiring and promotion practices and board construction of the underlying fund portfolio companies.

The Kellogg Foundation is intentionally backing fund managers and entrepreneurs of color, and seeking investments that systematically reduce bias in the financial system and broader society. 

How Kellogg Foundation is interrupting racial bias in capital markets

Fairview Capital Partners and Ford Foundation have launched a fund to invest through diverse fund managers as part of the foundation’s $1 billion endowment commitment to mission-related investing.

“Despite research report after research report that demonstrates that diverse managers perform at or above more homogenous teams, the capital markets are not changing the way they allocate capital,” Ford’s Christine Looney said in an earlier ImpactAlpha podcast. “This is one area where we see there is much more perceived risk than we believe exists, and a place we can really lean in.”

Catch up on all of ImpactAlpha’s Returns on Investment podcasts on iTunesSpotifySoundCloud or Stitcher.