The following is the transcript of a speech given by Emmett Carson on November 29, 2017 to the Chartered Financial Analyst Society San Francisco Endowment & Foundation Conference.
Thank you for the kind introduction and for the wonderful invitation to be with you for Chartered Financial Analyst Society SF’s inaugural Endowment and Foundation Conference. For many people, the investment manager process can be summed up by the most memorable line in the movie “Jerry Maguire,” played by Tom Cruise, when Cuba Gooding Jr.’s character repeatedly says, "Show me the money.” Ok, for true movie buffs or romantics, you might argue that the most memorable line was, “You had me at hello,” but I don’t think I have you yet. I hope that’s the case when I’m done.
In the time that I have, I want to make the case that there is no contradiction in wanting to maximize investment performance and championing investment management diversity. In fact, I want to suggest that the pursuit of maximizing investment returns actually calls upon institutional investors to be committed advocates for investment manager diversity.
I want to do three things:
- Talk about why investment manager diversity is the last taboo.
- Talk about what responsible investment committees can and should be doing to ensure that they aren’t leaving alpha on the table.
- Talk about Silicon Valley Community Foundation’s experience in tackling this issue.
Before starting, I want to define several terms and make one disclaimer. I define a minority- and/or woman-owned firm as one in which the ownership is 51 percent or more who are Asian, Black, Latino, Native American, Pacific Islander or female. I define an emerging minority- and/or woman-owned firm as one that has at least 51 percent minority or female ownership and less than eight to 10 years of experience. I use eight to 10 years of experience because this assures that the firms have gone through a full market cycle, typically thought to take seven years.
Calling seasoned managers with more than a decade of experience with proven track records “emerging managers” because institutional racism has limited their assets under management to $2 billion or less strikes me as further victimizing the victim.
Emerging managers may require a different strategy than seasoned managers. A set-aside strategy of carving out specific funds from the portfolio that are only available to emerging managers of color and women may be correct for unproven managers with only a limited track record. Suggesting that seasoned managers should be content with competing for 10 percent of the loaf rather than the whole loaf should be seen for what it is: the hidden and perhaps not-so-hidden bias of racism.
This is probably a good time for me to give my disclaimer. Some of what I am going to say may make at least one person in this room a little uncomfortable. Let me be clear, my remarks are not focused on anyone in this room. I am focused on those individuals who sit on investment committees that are not represented in this room.
Why is investment manager diversity the last taboo?
In 2014, I wrote a paper titled “Investment Manager Diversity: The Hardest Taboo to Break” with Mike Miller of Colonial Consulting, our foundation’s investment consultant. The purpose of the paper was to encourage my foundation colleagues to confront their hidden biases about the capacity of people of color to manage and invest money.
Achieving investment manager diversity is hard because we think the decision to hire an investment manager is based solely on investment results and does not involve bias. If we acknowledge that there is always going to be bias, then it’s relatively easy to address. Achieving investment manager diversity is also hard because committees rely on investment manager consultants who serve as gate keepers rather than door openers. After all, why pay for expert advice and then question their recommendations? If the consultants have bias — and, they do — then that is reflected in what investment firms get hired.
Nonprofit and for-profit organizations that routinely discuss and support diversity efforts with regard to their boards, staffing, grantmaking and vendors turn strangely resistant to having this conversation about who is investing their money. As I wrote in my paper on investment manager diversity:
“There is perhaps no area where I have seen discussions of diversity get short-circuited faster than in the area of investment management. Time and time again, I have watched CEOs and board members who are champions of diversity when it relates to providing grants to diverse communities, recruiting diverse board members and staff and hiring diverse vendors turn silent when the topic changes to investment manager diversity.”
Our hidden bias—that people of color are not as capable as others, especially as it relates to money management — gets in the way. And let’s be clear, in some cases, it’s not so hidden; it’s plain old racism. The same biased attitudes that are present in every U.S. institution are also present in the investment committees on which the people outside of this room serve. It is a bias that is not limited to any race or ethnicity.
So, why is diversifying investment managers important to do?
Yes, it is the right thing to do, consistent with our values as a country for success based on merit and, in the case of investment managers, we have a uniform yardstick to measure success — return on investment. By not engaging capable diverse investment managers, we are leaving money — alpha — on the table. As an institutional investor, my fiduciary responsibility is to maximize return to benefit the mission, and so by not fairly considering every qualified firm I am not maximizing my return.
This is why we need all institutional investors to be individually accountable for their actions and why we need a systems approach that changes the behavior of the investment consultants whose recommendations help drive which managers are hired.
While this may sound difficult, I think it is easily accomplished if we can get institutional investors, like those of you in this room, asking a few simple questions that are easy to measure and track. So what am I asking that you should do?
First, every institutional investor needs to track how many manager searches he or she conducted in a given year, how many of those managers considered were investment managers of color and women and how many of them were hired. If no investment managers of color or women are being recommended, that is a red flag to be discussed with your investment consultant. If no investment managers of color or women were being hired that the consultant recommended, that is also a red flag to have a candid discussion about bias that may exist with the investment committee.
Institutional investors at a minimum must become comfortable in asking their investment consultants on an annual basis how many investment managers of color or women they have recommended to their other clients and how many were hired.
It is not enough for institutional investors to track their own performance in hiring investment managers of color; we need to insist that the investment consultants who work for us are routinely recommending investment managers of color to all of their clients.
So let me share with you Silicon Valley Community Foundation’s experience in asking these questions and measuring our outcomes and those of our investment consultant. Before we launched this effort, we had three minority- and/or women-owned managers, with whom we had invested $52 million in assets.
As of the third quarter of 2017, SVCF has 12 minority- and/or woman-owned managers investing $182 million in assets. A total of:
- 16 percent of the firms are owned by women,
- 25 percent African American,
- 17 percent Latino American,
- 25 percent Asian American, and
- 17 percent representing multiple categories.
These diverse managers represent all asset classes:
- U.S. and global equities, 25 percent,
- International equities, 31 percent,
- Fixed income, 18 percent,
- Hedge funds, 14 percent, and
- Private assets, 12 percent.
Colonial Consulting, our investment consultant, has seen a dramatic difference in its ability to identify and recommend diverse investment managers. Between 2014–2016, Colonial Consulting met with a total 178 minority- and women-owned firms, 26 percent of which were first-time meetings. Even more revealing is the importance of the investment consultant’s recommendations over time. In 2013, before Colonial became intentional in their efforts, only 11 managers of color or women-owned firms were recommended, of which seven were hired, a 63 percent success rate. In 2014, Colonial recommended 23 minority- and/or women-owned firms, of which 18 were hired, for a success rate of 78 percent. In 2015, Colonial recommended 25 minority- and/or women-owned firms, of which 22 were hired, for a success rate of 88 percent. In 2016, Colonial recommended 26 minority- and/or women-owned firms, of which 26 were hired, for a success rate of 100 percent. Collectively, these firms manage $887 million in assets.
I would honestly tell you that I am stunned that by simply asking a few questions of ourselves and our investment consultant that SVCF could see such a remarkable change in our investment managers and overall with our investment consultant. Is this enough? Of course not. However, imagine what would happen if just half of you in this room made a commitment to ask these questions about investment manager diversity of your investment committees and your investment consultants? We would increase our investment returns, be on the right side of history on this issue and have a transformative impact on the entire investment field. It is my sincere hope that you will meet the entirety of your fiduciary responsibilities by embarking on this journey as we model America’s future and not our past.