Institutional investors demonstrated racial bias when asked to evaluate fund management teams led by white vs. black men, according to research published Monday by Stanford University and Illumen Capital, a venture capital and private equity firm in Oakland, Calif.
The case study found, in fact, that top-performing, black fund managers "may be most harmed by racial bias," the research paper said.
"Even when funds led by people of color possess identical, strong credentials as white male-led funds, they are judged more harshly. In contrast, white male fund managers are advantaged by these biases, which perpetuate their disproportionate representation in the industry and the association between whiteness and investment success," the paper said.
The research on racial bias in institutional investing was published in the scientific journal Proceedings of the National Academy of Sciences, and funded by Prudential Financial and the William and Flora Hewlett Foundation. The paper, “Race influences professional investors’ financial judgments,” was co-authored by Sarah Lyons-Padilla, Hazel Rose Markus, Ashby Monk, and Jennifer L. Eberhardt at Stanford University, and Sid Radhakrishna, Radhika Shah and Norris A. “Daryn” Dodson IV at Illumen Capital.
For the study, researchers asked 180 primarily white asset allocators to evaluate "one-pagers," or short summaries of fund manager team credentials and their track record on previous investment strategies. They created one-pagers displaying four fictitious venture capital teams — two were led by black male managing partners and two by white male managing partners. Additionally, the black and white male-led funds each featured teams with a strong and weak performance track record, according to the paper.
"To test for the presence of bias, we analyzed asset allocators' responses to the following: overall performance ratings of the team, evaluations of investment skills, attributions of competence, attributions of social fit, expectations of how much the fund would raise, and the likelihood of taking a meeting with the team, beginning due diligence and investing in the team," the paper said.
While researchers saw evidence of bias against the funds led by black men — asset allocators did not rate the strong, black male-led teams as favorably as the strong teams led by white men — they also found asset allocators could not distinguish between the stronger and weaker fund management teams led by black men.
Overall, the case study found that people of color in the asset management industry "are likely to encounter more bias as they achieve stronger credentials," researchers found.
Researchers likened the findings to the results of a March 2018 study by Natasha Quadlin of Ohio State University, which found that women job seekers with the strongest credentials were penalized substantially more than men and more than women with weaker credentials, the paper said.
The study suggests that asset owners should be trained "to overcome their biases by revamping their investment criteria and strategies and ensuring they are knowledgeable about the success of firms led by people of color," the paper said.
