Bert Feuss, senior vice president, investments at the $13.5 billion Silicon Valley Community Foundation, SVCF, explains why diversity is so important, the steps the impact investor has taken to address the institutionalised lack of diversity and the impact on performance.
Q: Why is it important for SVCF to seek diversity in the people who manage your investments?
A: First and foremost, it’s aligned with our values of inclusion and diversity. We started working on this eight years ago. We looked at the diversity of our staff, of our grantees, of our board and of our community. Then we looked at our investment portfolio and it was clearly lacking diversity. And at the same time, if you truly believe that diversification of an investment portfolio across different strategies, different geographies, different points of view and different ideas generates better returns and differentiated returns, then it naturally follows that you would want to diversify your investment managers.
Not only was diversity in line with our values but it was aligned with our fiduciary duty, so we began asking ourselves and our investment consultant, Colonial Consulting, what the barriers were to identifying talented minority and women-owned investment companies. SVCF relies on Colonial for manager research and selection, so we asked them to demonstrate to us that their process for finding managers was inclusive. They began reporting on:
1. How many managers they meet with each year and how many of those firms are women or minority owned
2. How many of those managers are recommended to their clients other than SVCF and
3. How many of those diverse managers are hired.
I would also like to point out that addressing an institutionalised lack of diversity requires intentionality. As we and Colonial delved into this work, it took a while to integrate these practices into our daily routines. For example, Colonial had to modify their databases to capture this information. When they told their staff what they wanted to do there was a lot of support, because their team was already very diverse. There was also some pushback since it was creating additional work. It was an adjustment on both their side and ours.
Then in 2015 they hired a dedicated head of manager equity, Angela Matheny. Because of her outreach, the number of meetings with diverse and women-owned firms shot up dramatically. In 2018 they met with over 515 managers, 202 of which were diverse, compared with 2016 when they met with only 50 diverse managers.
Q: Can you elaborate on why diversity is important to generate returns?
A: As I noted earlier, different experiences and backgrounds drive differentiated return streams. Often too, these newer, smaller managers are still building their businesses so they’re really focused on driving performance. They’re grateful for the opportunity and feel tremendous commitment to do well by their clients.
Q: How did diversity impact performance?
A: So far, Colonial has found that out of 19 managers deployed across their client base, all but four beat their benchmark. The four that didn’t had only missed the benchmark by less than 1 per cent. The ones at the top of the list wildly outperformed the benchmark, by hundreds of basis points. The results were promising. You need managers with different points of view and different life experiences who understand different parts of the world, understand different sectors, understand different geographies. Not just white males who attend Ivy Leagues schools and worked for a private wealth management firm in New York.
Q: What are other people in the investment business doing? Are other firms working to diversify the firms that manage their funds?
A: We definitely have seen a growing interest in this approach over the last few years. Other community foundations and private foundations with similar values have reached out to us. Consultants have also contacted us to understand how we approached this.
Q: What questions do these groups asks? What are their concerns?
A: They often want guidance on building consensus within their organisation to move the idea forward with their board and investment committee. Consultants have told me “Well, we’ve looked and we can’t find these managers,” which Colonial has disproved easily. There are also the concerns around performance, which demonstrates the inherent biases that people have.
Q: Why it is important that the ownership of the firm is diverse, as opposed to just focusing on the staff?
A: We look at the firm’s ownership, because that’s where the profits flow, that’s where the decisions are made. Then it’s also important that the teams themselves are diverse. When we meet with firms we’re always asking them about the diversity of their firm and how they share the returns that they’re earning? Are profits broadly shared across the teams? We want to see aligned incentives and that everyone is participating.
Q: Have you been able to find diverse managers across asset classes?
A: Yes, we have found diverse managers — or Colonial has on our behalf — across all asset classes. And if you look at how our assets are deployed across, say US equities, international equities, fixed income, hedge funds, private equity, it’s pretty well dispersed. Similarly, when you look across African American, Hispanic, Asian or multiple mix of those, and women, it’s pretty well spread out evenly across those groups.
Bert Feuss is senior vice president, investments, at the Silicon Valley Community Foundation, the largest community foundation in the world. According to its 2017 Annual Report, SVCF has $13.5 billion AUM.