Panel: Investors should view diversity as a strategy

Including diverse money managers in an investment portfolio should be viewed as an alpha play, investment executives say.

Speaking at the second in a series of Pensions & Investments virtual roundtables on June 22, panelists discussed the benefits that hiring diverse or emerging money managers — such as those that are minority-, women- or disabled person-owned — can bring to an institutional investor's overall portfolio.

"It is about being a good fiduciary," said Angela Miller-May, CIO at the Public School Teachers' Pension & Retirement Fund of Chicago. "Diversity should be looked at as a strategy like (an) ESG strategy or factor strategy. There is a diversity strategy that brings about increased alpha, and more than anything … that is what it is about for a public fund like ours that's underfunded — to make sure that we can put our capital with managers that are (going to) diversify our portfolio, (and) bring excess returns when we need it," she said.

The Chicago Teachers' Pension Fund had $13 billion in assets as of May 31. Ms. Miller-May said about 48% of its assets are allocated to diverse managers, the performances for which are not split out. CTPF's latest available funded status was 45.4% as of June 30, 2020.

Boston-based Cambridge Associates LLC's diverse manager research team evaluates all the managers with which the firm partners on the basis of diversity.

"The way that we see it is that diversity is an asset, a tool that particularly money managers use to increase performance," said Jasmine N. Richards, head of diverse manager research. The team thinks of including diverse managers as a way of pursuing "what all investors are looking for: increased returns and reduction of risk. … There's been tons of research that shows that diverse teams are more innovative, more creative, perform better … (and) when you have different perspectives at the table … it reduces the risk in the portfolio," Ms. Richards said. "In essence, what you're investing in is a fund manager's ability to source different deals, access different networks. And for us, it just makes sense that diverse teams would be able to pursue different opportunities (than) their peers."

A study by the John S. and James L. Knight Foundation, Miami, showed that diverse firms perform just the same, "if not better," than non-diverse firms, said Gilbert A. Garcia, Houston-based managing partner at Garcia Hamilton & Associates LP. "That makes perfect sense to someone like me because in the lives of all of us that are diverse … in many ways we've had to work harder (and be better.) And so in many ways it makes perfect sense to me that we perform as well, if not better," he said. Mr. Garcia thinks diverse firms are typically "more nimble … more entrepreneurial because (diverse managers) typically own their firms (and) just can move faster."

"They can exploit smaller markets," he added. Mr. Garcia also leads a subcommittee focused on diversity and inclusion for the Securities and Exchange Commission's Asset Management Advisory Committee. Garcia Hamilton has more than $17 billion in assets under management.

Ms. Miller-May agreed: "It is about hiring managers that are nimble and can provide the best solutions in times where the markets are volatile. And we're looking for those managers that can pivot and understand what is going on, and that can be forward-thinking. And we find those characteristics in diverse managers."

As well as looking at diverse managers, panelists said it's still important to evaluate and meet with non-diverse firms, if only to keep an eye on what they're doing and how they progress.

Ms. Miller-May, for whom legislation dictates she and her investment team must allocate at least 20% of assets to minority-, women- and persons with disability-owned firms, said any manager that comes into the pension fund's boardroom "expects to be asked about their diversity," with executives in turn expecting them "to have a good answer," she said.

CTPF executives want to not only consider diverse managers, "but we want to look at those non-diverse managers and make sure that they have the systems and the processes (in place) that increase diversity because we believe that those diverse candidates that they hire and promote are the next generation of diverse managers," Ms. Miller-May said.

Diverse managers were included in the portfolios of 59% of Cambridge Associates' clients at the end of 2020, which is "exemplary of the fact that we are going out and finding undiscovered, underinvested-in investment ideas" that clients are investing in based on merit.

The top request Ms. Richards saw from Cambridge's clients last year was to send a list of diverse managers with which to meet. "I think that that is necessary, but largely insufficient" in moving the needle.

The barrier is that, as investors and allocators, "there are ways that the metrics and the systems that we have historically used have inherent biases baked into them," Ms. Richards said. "And so, until we address those, just taking different meetings is going to be insufficient."

If an investor meets with managers but is using the same processes with the same biases, they are "going to end up with the same results," Ms. Richards added. Asset allocators asking for a "10-year track record in an industry that has been historically non-diverse" is an example of "baked-in bias." Work needs to be done on evaluation metrics, she added.

Rupal J. Bhansali, New York-based CIO and portfolio manager, international and global equities at Chicago-based Ariel Investments LLC, said the heart of the issue in terms of asking the right questions of diverse managers "is holding people accountable for the right outcomes. … Diversity can end up being tokenism."

If success is defined as taking more meetings with diverse managers, but actually less than 1% of all assets are run by diverse managers, something doesn't add up, Ms. Bhansali said. It doesn't matter how many meetings an investor takes, how many metrics they use to measure diversity and managers, how many questions are asked in a due diligence questionnaire — the important thing is to "ultimately hold (managers) accountable for the outcomes, not the effort."

The inclusion of diverse money managers in an investment portfolio should be viewed as an alpha play, with the potential to boost returns.