Diversity programs change with the times

Even some of the earliest adopters of diverse or emerging manager programs are finding the need to change as they outgrow their original goals or face mandates to grow.

The Maryland State Retirement & Pension System, Baltimore, started in 2007 with its Terra Maria program for emerging managers. Since then, it has been reinvented and expanded to where 20% of the $62.5 billion portfolio's managers are diverse, CIO Andy Palmer said.

As they continually diversify the portfolio, "this has been a good exercise. ... We believe this is a fundamental part of what we do," he said.

The bigger problem he sees is getting more diverse candidates into the asset management industry. That challenge is gaining "a lot of traction" with public pension funds, he said, and has accelerated by the events of 2020 that brought racial inequalities into sharp focus.

To address the shortage, the pension fund is working with area colleges and even middle schools to promote the career path and to fill its own programs for interns and associates. It also has started collaborating with prominent firms like its Baltimore neighbor T. Rowe Price Group Inc. to improve the numbers.

"It's becoming more of a priority," he said.

Instead of what he calls the "rifle shot" approach of a diverse manager program, he expects more diversity throughout organizations overall. "I think you will see a lot of changes," Mr. Palmer said.

Maryland was one of 11 sponsors to report how much they invest with diverse managers and the number of those managers, questions new to this year's Pensions & Investments survey of the top 1,000 pension funds. Maryland ranked second on that list, investing $12.1 billion with 57 managers. Maryland is one of 27 plan sponsors indicating their plan has a diverse hiring policy.

Exelon Corp., Chicago, which reported investing $1.7 billion with 26 diverse managers, in 2020 added its own investment and legal divisions to a long-standing diversity and inclusion program.

Another early adopter, the $53.5 billion Teachers' Retirement System of Illinois, Springfield, has seen four iterations of an emerging managers program that started in 2005.

The $79.5 billion Massachusetts Pension Reserves Investment Management Board, Boston, has had an emerging manager policy since 2011, with a goal of investing 5% to 10% of new and current investments with emerging and diverse-owned managers. It defines those as firms where women and/or minorities own more than 25% of the company.

And things changed dramatically in January, when Massachusetts Gov. Charlie Baker signed a new law requiring MassPRIM to increase to at least 20% the diversity of both investment managers and consultants the state trust fund hires. It will also have to revisit its investment policy to see if it presents barriers to minority investment managers such as years in operation, track records or minimum assets under management, and must start reporting its progress to the state Legislature.

It is the next step "of a much longer journey," said spokeswoman Elizabeth Herlihy. "We are continually assessing how we can improve existing programs to influence lasting, positive change."

Beyond increasing manager diversity within the pension fund portfolio, the goal is "to enhance economic equity in the business community for generations to come," said Massachusetts Treasurer Deborah B. Goldberg, who serves as MassPRIM's chairwoman.

Michael Trotsky, MassPRIM executive director and CIO, is a founding member of a CFA Institute committee helping to develop a global diversity and inclusion code of conduct aimed at more inclusion and better investment outcomes.

MassPRIM is also part of a growing number of institutional investors joining coalitions to increase diversity on corporate boards. The Northeast Investors' Diversity Initiative is made up of the state treasurers of Rhode Island, Connecticut, Maine, Vermont, Massachusetts and New York. The Midwest Investors Diversity Initiative, a coalition of institutional investors with a collective $820 billion in assets under management and advisement, uses corporate engagements and shareholder rights to protect shareholder value and maximize returns. Its public members include the $24.6 billion Illinois State Board of Investment, the $85.7 billion Minnesota State Board of Investment, the $104.3 billion Ohio Public Employees Retirement System and the $15.2 billion School Employees Retirement System of Ohio.

In the corporate world, progress on hiring diverse managers is not coming as fast as it is with public pension funds or endowments, said Nimisha Srivastava, global head of credit at Willis Towers Watson PLC in Charlotte, N.C., and a member of its inclusion and diversity task force. Still, she said, "every other week we get a call with a client who wants to understand it."

"In our minds, the first starting point is, diverse teams lead to better outcomes. People have gravitated to that idea," Ms. Srivastava said. She agrees that expanding the pipeline of diverse managers is important, rather than just pressure from asset owners to have specific programs. "It's not necessarily adding a program; it's saying how can we get managers to add more?"

That type of engagement seems to be working, she said; even clients with diverse programs are changing their minds about taking a broader approach, including outreach as well as hiring. While larger asset owners have more scrutiny from stakeholders and may want to demonstrate action by recruiting and hiring managers, "hopefully they can do both," she said. "We are at sort of at an inflection point."