The financial industry is known for being a boys club, especially where asset management is concerned. Firms with at least 50% minority or women ownership represented just 0.9% of total assets under management (AUM) in funds in 2017, according to the Knight Foundation's latest "Diversifying Investments" report. If you lower the bar to include firms with 25% to 49% diverse ownership, the number hardly improves at 1.3% of total AUM.
And yet the Knight Foundation report reveals that female and diverse asset managers are overrepresented in the top quartile performers, meaning these diverse teams are more likely to outperform. This suggests investors should pay more attention to the people running their investments if they want better outcomes.
We spoke with John Gomez, president and founder of Brentview Investment Management, who has recently undergone the steps to certify as a minority business enterprise, about how investors can have an impact by choosing funds that are managed by diverse teams. He shares why diverse asset managers are not only good for social equality, but also for investors' portfolios. Here are edited excerpts from that interview.
Why is diversity in management teams important?
The demand by potential investors for transparency around diversity and other environment, social or governance considerations is on the rise. Having a diverse management team may provide additional perspectives that help form more comprehensive opinions. Even when considering U.S.-based companies, many of these companies have become increasingly exposed to global economies. As a result, a diverse portfolio management team might uncover the early identification of both opportunities or risks.
The diversity of the management team can be an added benefit for investors. Diversity adds another element of experience and judgment that would not be present if everyone on a team came from the same place. In short, having people with different backgrounds, cultures and ethnicities might broaden a team's point of view, which may help in identifying potential risks and opportunities.
How can investors and advisors better find diverse fund management teams with which to invest?
These women- and minority-owned firms may manage mutual funds that are not recognizable household names, but they may provide strategies that fit most portfolios. With some research, you might find some smaller strategies that have delivered strong performance and have diverse portfolio management teams.
Databases like Morningstar are still coalescing information that will eventually provide more details for individual investors to take into consideration regarding the employee diversity of an investment manager. In the meantime, investors need to do their own research to determine the diversity of the management team.
If the investor wants to focus on minority firms, an organization like the National Minority Supplier Development Council could be helpful in identifying members. If the investor is concerned about climate change, Principles for Responsible Investment, a United Nations initiative, will provide a directory of signatories that will enforce sustainable investing. Finally, if the investor wants to support military veterans, the National Veteran Business Development Council could also be a great resource. While not an all-inclusive list, these organizations might serve as good starting points.
What questions should advisors and investors ask of these funds before investing in them?
Generally, the questions that investors should focus on are related to the "Four P's:" people, philosophy, process and performance. If diversity is a key criteria, the people involved in the portfolio should be the focus of your due diligence. How many members are there? What is the diversity of the team? What is the diversity of the investment manager overall?
How the portfolio manager views their markets is also important. Since investing can be an emotional process, finding strategies that match your own views can also be meaningful. Understanding the investment philosophy and its compatibility with your own investment views will be key. Process-oriented questions might be more focused on what causes you to buy or sell a particular company. How do you find ideal portfolio candidates? Do you focus on economic items – a top-down approach – or do you focus on company-specific items – a bottom-up approach?
Finally, when people, philosophy and process are taken together, the outcome should hopefully lead to strong performance. The investor should review how the manager performs in challenging markets as well as strong markets. What did their peer group do in that same time frame? In what environment should this strategy do well? What environment is challenging for this portfolio?
How should investors and advisors be applying this diversity lens to their investment approach?
After an investor decides how their portfolio should be allocated, they should do some research on the specific asset classes or investment styles. For example, if they determine that they will allocate toward large-cap blend equity, the next step should be researching investment strategies that fall within that category.
Once the strategies of interest are identified, the investor would review the Four P's for each particular firm. This process can be time-consuming when done on your own. However, if the investor is working with a financial advisor, identifying your goals as well as social considerations should be discussed up front. In this way, the financial advisor can take those aspects into consideration when selecting strategies.
Source Publication: U.S. News
By: Coryanne Hicks