Confronting real bias in asset management to set the record straight on DEI

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ImpactAlpha Editor

Dennis Price

ImpactAlpha, Feb. 5 – The gloves are coming off.

Attempts to roll back initiatives promoting diversity, equity and inclusion, or DEI, have opened the door to a more fulsome debate about the real racial biases affecting the makeup of the managers who steer more than $82 trillion in investment assets in US capital markets. 

The campaign against DEI has included lawsuits and state legislation, as well as diatribes from hedge fund billionaires like Pershing Square’s Bill Ackman and Citadel’s Ken Griffin.

Bring it on, says political strategist Robert Raben, who as head of the Diverse Asset Managers Initiative is raising the heat on firms that appear to be “curating for whiteness.” 

If DEI opponents are serious about barring race as a selection factor, “Explain the studies that show 98.6% of assets are managed by white men,” the former US assistant attorney tells ImpactAlpha. “I used to have to pretend to be nice because people didn’t like being attacked. Now that they’re attacking, we can take the gloves off and really talk about what’s going on.”

Diversity of perspectives

For years, diversity advocates have watched the ranks of asset managers as an indicator of the broader representation of women and people of color in the US financial system. The gap between the diversity of the country and the diversity of asset managers has been seen as a proxy of continued racial and gender wealth gaps more broadly. 

By diversifying who manages the nation’s wealth, “we can better tap unforeseen opportunities and build a more equitable and prosperous future for us all,” write the authors of the latest in a series of Knight Foundation reports on the asset management industry. “Different viewpoints help assess risks, opportunities and unseen possibilities in traditional and emerging markets.”

Initiatives to promote that diversity have been oft-proclaimed but broadly ineffective in shifting assets. Of the $82 trillion in U.S. investment assets, all but roughly $1 trillion in assets are “under management” of white, male-owned firms. The same tiny percentage of assets is largely unbudged before, during and after the racial reckoning that followed the murder of George Floyd

Progress on Wall Street has been relatively genteel. The theory of change: Data brings transparency. Transparency raises questions. Answers reveal practices and biases in need of change and… the industry would change. That hasn’t happened. 

Researchers from the Knight Foundation have likewise benchmarked performance and consistently found “no statistically significant differences in performance between diverse- and non-diverse-owned funds across asset classes.” In addition to raising awareness, champions of greater representation have established emerging manager programs and built a talent pipeline of high performing asset managers. 

The ample supply has met low demand from institutional investors. One study even found that the better Black managers performed, the more racial bias they seemed to face. Despite pledges and promises, little progress was made on growing assets managed by diverse-owner firms.

Weaponizing DEI

Then came last year’s Supreme Court ruling in Students for Fair Admissions v. Harvard, barring affirmative action in higher education admissions. The ruling turned diversity, equity and inclusion, or DEI, into a target across the economy. 

Conservative strategists have hit companies, government programs and venture capital firms, including Fearless Fund and Hello Alice, with lawsuits claiming that race-specific granting and lending strategies amount to racial discrimination, against white people. 

Republican attorneys general in July sent a threatening letter to Fortune 100 CEOs suggesting that DEI hiring practices have been rendered “unlawful and wrong by the Supreme Court’s overruling of affirmative action in higher education.”

The anti-DEI campaign is part of a larger strategy run by conservative activists to push against a range of progressive policies. That includes the effort to delegitimize so-called environmental, social and governance, or ESG, investing. 

A New York Times investigation found that a movement of conservatives centered at the Claremont Institute, a California think tank aligned with the Trump movement, considered targeting “social justice” and “diversity” before settling on the more amorphous “DEI.” The goal: “Strike a killing blow against ‘the leftist social justice revolution’ by eliminating ‘social justice education’ from American schools.”

Like-minded conservative activist Christopher Rufo has run a similar playbook to galvanize support for right-leaning policies, seizing on terms like critical race theory, gender ideology, and now, DEI. Given the structure of our institutions, he told Politico, “this is a universal strategy that can be applied by the right to most issues.”

DEI became fully weaponized by late last year with the ousting of Harvard’s first Black president, Claudine Gay. The campaign against Gay was given political cover by conservative leaders such as Rep. Elise Stefanik, the fourth-ranked House Republican, who embarrassed three university presidents at a congressional hearing on their responses to antisemitism on campus.

Rufo and other activists piled on Gay with accusations of plagiarism. DEI, they deceptively argued, helped Gay become Harvard’s first Black woman president in the first place. Rufo, who earlier had helped concoct the frenzy over so-called critical race theory, used financial leverage against Harvard, as donors like Ackman stepped up the pressure. 

In one tweet following Gay’s ousting, Ackman called DEI “inherently inconsistent with basic American values,” suggesting the process used to hire Gay “excluded a large percentage of potential candidates due to the DEI limitations.” Reverse racism is racism, he wrote, “even if it is against white people.” 

A separate post that Ackman retweeted into his “X” timeline called diversity, inclusion, equity “a cancer that destroys human dignity, excellence, fairness, justice and meritocracy.”

Racial bias

The anti-DEI attacks provide an opportunity to take a deeper look at the real racial biases in asset management.

Ackman, who manages the $18 billion New York hedge fund Pershing Square, “says out loud what so many people falsely think,’ says Raben, founder of Washington, DC-based The Raben Group, which manages the Diverse Asset Managers Initiative.

Ackman’s anti-diversity statements run counter to Pershing Square’s own stated values on diversity, and may violate the firm’s fiduciary duty, says Raben. If Pershing Square and other firms know that diversity enhances value, and yet actively campaign against it, who exactly is sacrificing the best interests of investors? 

The Congressional Black Caucus sent a letter to Ackman and Pershing Square last month requesting diversity data from the firm. Raben and DAMI helped prod the caucus to make the request. 

“We write to express our concern about your recent public statements opposing DEI practices, which directly contradict Pershing Square’s stated diversity commitments,” read the letter signed by Rep. Steven Horsford, the Nevada Democrat who chairs the CBC, and other members. 

Pershing Square’s 2023 ESG statement, noted the CBC, suggests “promoting diversity in all of its forms is an integral component of [a] continuing quest for excellence” and believes that a “diverse team is a competitive advantage.” 

“We believe that Pershing Square’s diversity data is probative of your genuine goals, as these figures demonstrate actions, not words,” wrote the CBC members.

“We strongly believe that diversity is an economic imperative and a crucial element of fiduciary duty,” the letter concluded. “Given the billions of investment dollars managed by your firm and the proven positive impact of DEI practices on performance, innovation, and profits, we look forward to receiving the requested information.” The Caucus set a January 19 deadline.

A Pershing Square spokesman did not respond to requests for this article nor provide the firm’s response to the Congressional Black Caucus request. 

One commonly held falsehood at the highest levels of finance is that efforts to boost diversity threaten performance. A 2021 Morgan Stanley survey of dozens of senior investment decision-makers from public pension funds, university endowments and insurance companies, for example, found that 70% of white asset owners believe diversity is important but requires a sacrifice in returns. 

The Knight studies have consistently proven this false, finding that “performance is empirically indistinguishable among minority-owned, women-owned and other firms.”

Another common perception: that Black investors that do perform are somehow one-offs. A separate study from Stanford SPARQ, revealed that the highest-performing Black asset managers, not the lowest, were less likely to win asset allocations. 

“That is a five-alarm fire,” says Raben. “They overlook white mediocrity, but when there’s Black excellence, they explain that away.” He continued, “It gives me an opportunity to work with people to say, what are you doing about the fact that you disbelieve Black success?”

Accounting and accountability

The backlash against DEI has caused many firms to retreat from their public commitments, although many have sought quieter ways to continue to increase representation. Raben says despite the attacks, much of corporate America remains sold on the value of diversity.

At last month’s World Economic Forum, JPMorgan’s Jamie Dimon, referring to himself as “a full-throated, red-blooded, patriotic, unwoke, capitalist CEO,” said the bank isn’t retreating from its diversity, equity and inclusion efforts.

And among companies in which Pershing Square maintains large stakes, Chipotle, Hilton, Lowe’s and others all have “robust” DEI programs in place, notes the CBC.

Raben says a critical mass of public pension funds, universities and philanthropies now report their utilization of diverse asset managers. Forty of the top foundations report annually. DAMI has also helped create “a culture of reporting” at the top investment consulting firms with an annual diversity survey. 

Raben says DAMI’s job now is to provide the cover for firms to continue to push. “There are lots of platforms, federal and state, by which further interrogation, formal or informal, can be done to suss out what’s going on,” says Raben. 

In response to the pressure on Fortune 500 companies from Republican attorney generals, Raben sent a letter to the chairman of the group, Alabama attorney general Steve Marshall. In it, he requested an investigation into three investment firms in the state, “which appear to have all-white leadership teams.” He did not receive a response. 

“You want to go down a legal and cultural path that says you can’t curate by race and gender? Let’s have that conversation.”

Watch for more inquiries from the Equal Employment Opportunity Commission, the Securities and Exchange Commission and Congress. State licensing boards, legislative committees and discrimination watchdogs can also probe deeper for bias within firms. 

The scrutiny is in service of a broader shift in public opinion to position DEI not as a burden but as a value-driver. Raben says he is sold on the proposition “that talent is distributed evenly, that women are as talented as men, and that Black people bring in business just like white people.”

“When you get there culturally, it really doesn’t matter what the Harvard case says,” he says. “My goal is not a legal victory here. This is a cultural fight.”