Impact Voices | May 1, 2024

Investment manager diversity matters when investing for health equity

Rochelle Witharana

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Guest Author

Rochelle Witharana

Editor’s note: This article is part of a partnership between ImpactAlpha and Mission Investors Exchange (MIE) to present new ideas and perspectives in impact investing. The MIE 2024 National Conference takes place May 7-9 in Los Angeles. If you are a foundation or other philanthropic asset owner, learn more about MIE and the National Conference here

In 2017, The California Wellness Foundation (Cal Wellness) began investing more of our endowment dollars to align with our mission and vision. We are committed to protecting and improving the health and wellness of the people of California by increasing access to health care, quality education, good jobs, healthy environments and safe neighborhoods. In 2020, our board approved investing 100% of our endowment in alignment with these goals. As our impact investing practice has grown, it was natural to us to incorporate the values of diversity, equity and inclusion (DEI) that have been guiding principles throughout our history.

Without this deep commitment to equity, we firmly believe that we cannot sustain our efforts to support communities in eliminating the systemic barriers that prevent access to health care, education, employment and safety. At a basic level, we apply a DEI lens to all areas of our work starting with board governance, and down the line: how and when we choose to use our institutional voice, addressing staff recruitment and retention, grantmaking strategies and decisions, and finance and operations. To that end, bringing DEI into our decision-making around selecting investment managers has become a fundamental part of our work.

An evidence-based approach

There’s solid research that helps build the case for increasing diversity among an investment team. Diverse teams who avoid groupthink and leverage cognitive diversity can make better decisions than and outperform homogenous teams. But despite such evidence, most fund management teams today are still homogenous. Many investors may be missing out on the benefits of diverse decision-making teams. We believe it is our fiduciary duty to consider diversity when selecting investment managers to attain our financial goals and further our mission.  

Looking specifically at investment performance:

  • WTW’s 2023 analysis found investment teams in the top quartile of gender diversity outperforming those in the bottom quartile by 45 bps per annum.
  • A 2018 study in the Harvard Business Review looked at the diversity of thousands of venture capitalists and found that if VC teams had the same ethnicities, their success rates were lower by 26.4% to 32.2%.
  • WTW’s 2020 analysis looked at 400 products across a number of asset classes over several years, including benchmark-relative returns and found “investment teams with diversity, in particular ethnic diversity, tend to generate better excess returns.”

Sourcing diverse asset managers

We don’t stop at DEI data when considering investment managers – their experience and perspective is valued. These managers are well-positioned to identify and advance opportunities we might otherwise miss. We’re looking for women and people of color to have ownership and leadership of these funds and be represented throughout the rest of the team. 

The rationale for measuring ownership and leadership is that it allows diverse founders to monetize wealth and support firm growth by seeking outside investors. This has led to some difficult conversations and tough decisions with potential managers, but we hope that advocating for our point of view may lead to change.

We have developed an impact framework whereby we score all our investments on two pillars: 

The first pillar is manager strategy alignment based on Cal Wellness’ mission and social impact.  

The second pillar – manager diversity framework – measures several manager diversity definitions with distinct impact objectives. The first measure is having a significantly diverse team (greater than 33% women/people of color (POC)) – as studies suggest that 33% is a “tipping point” where there is increased collaboration and inclusivity. The second is Majority Diverse (greater than 50% women/POC) addresses continued racial/ethnic and gender under-representation in positions of authority within the investment field. The third is majority POC – greater than 50% POC. Here we are seeking to allocate capital to build wealth in historically underserved racial/ethnic communities.

Underserved communities 

We also look for diverse managers who have a commitment to invest in diverse entrepreneurs and in initiatives that reduce structural inequities in California’s underserved communities. That goes for investment firms as well as individual managers. Our scoring and tracking data demonstrate this characteristic is strongest when ownership is greater than 50% POC.

Some examples that come to mind are our investments in Twine Ventures and Chingona Ventures. Both are first-time funds led by women of color that invest heavily in portfolio companies also led by women and/or Black, Indigenous, and People of Color (BIPOC) individuals. VamosVentures is another first-time fund on a mission to create alpha and impact by funding Latinx and diverse founders. 

Rethink Impact is an established venture capital firm investing in female and non-binary leaders using technology to solve the world’s biggest problems, and Slauson & Co., a diverse team with an unwavering focus on economic inclusion. 

Arc Capital Partners is a real estate investment manager that targets high barriers-to entry markets through a lens of diversity and inclusion. These investment strategies are aligned with our mission to advance health equity, targeting solutions that address community wellness from multiple angles, including education, human, societal, and planetary health.

For more information. At Cal Wellness, we partner with the Diverse Investing Collective, which is building a coalition of asset owners and allocators who are willing to call for more transparency and diversity on their investment teams to drive social and financial returns. Efforts such as this one helps to shift the paradigm of capital by  promoting and supporting assets managed by gender-diverse and racially-diverse fund management teams.

Rochelle Witharana is Chief Financial Officer of The California Wellness Foundation.