ImpactAlpha, June 13 – “The asset management industry has a lot of work to do to increase racial and gender diversity,” says Gary Gensler, head of the U.S. Securities and Exchange Commission.
That’s an understatement: Less than 1% of the $70 trillion in industry-wide assets under management are managed by female or minority-led asset managers, despite a growing body of research that suggests the performance of diverse-led firms matches or outperforms all-white, all-male teams.
The SEC and state regulators are set to test the proposition that required disclosure will prompt asset allocators to revamp their processes and improve their records. An SEC committee last week unanimously recommended that asset managers, advisors and consultants be required to disclose diversity data and business practices relevant to gender and race.
That’s a start, says Illumen Capital’s Daryn Dodson, but, “Disclosure is not enough. “We must also seek to address the racial biases that underestimate and overlook women and people of color leaving returns on the table.”
Earlier, on The Reconstruction podcast, Dodson said, “Everyone loses when we have sub-optimal asset allocation.”
California case study
The state’s 2018 law “urged” the Office of the Chief Investment Officer at University of California to improve diversity among its endowment managers and in its own employment ranks. In its second annual report, however, the university shows a dip in assets managed by diverse managers. The report covers only $102 billion of UC Investments’ $130 billion AUM, excluding assets managed internally or by non-U.S. firms.
Robert Raben, founder of the Diverse Asset Managers Initiative, says UC should get points for transparency. “Only by producing and critically examining diversity data can we create meaningful change and boost the bottom line.”
Asset allocators’ screens that exclude smaller and newer managers all but eliminate asset management firms owned by women and people of color. “Discrimination against diverse managers has effectively been codified in diligence checklists on ‘how to fulfill your fiduciary duty’ when selecting asset managers,” wrote three members of the SEC committee.
Gilbert Garcia of Garcia Hamilton, Scot Draeger of R.M. Davis and Paul Greff of Ohio Public Employees Retirement System recommend fiduciaries widen their scope in selecting managers.
Another red flag: Decades of political “pay to play” contributions and lobbying for mandates may still be reinforcing gender and racial exclusion.
“The theory is that by shining transparency on this, market forces will change the makeup,” Garcia told Reuters.