Asset owner collaboration is key to solving the deep inequity issues in investment management ownership and capital allocation.
Assessing, managing and changing diversity, equity and inclusion (DEI) is set to become the data issue of the 2020s, as investors turn their attention to the power they have to advocate for change in the companies they invest in, and the firms that manage their money.
“Mapping racism as a systemic risk means we should track this across the portfolio, but right now we don’t have the tools or the data,” says Henry Jones, chair and president of CalPERS.
“It is not unlike where we were on climate as a systemic risk, we didn’t have the information and had to build a data model and action plan with our partners. We need to do that with addressing racism.”
As an indication of how big the problem in in this industry, a 2019 study commissioned by the Knight Foundation found that asset management firms owned substantially or majority-owned by women or people of colour managed only 1.3 per cent of the industry’s total assets under management.
Last month David Swensen, chief investment officer of the Yale endowment wrote to all the fund’s investment managers highlighting the importance of diversity and asking managers to be accountable for the diversity within their ranks. He called on them to “join Yale in making a serious effort to improve diversity in the asset management industry”.
The ability to scientifically measure DEI is an important step in incorporating it into decision making, according to Jason Lamin founder of Lenox Park Solutions.
His firm, a Texas-based financial technology start-up, has developed statistically rigorous methodology to rank asset management industry participants on diversity data that it collects through its aggregation tools housed on its Roundtables Platform – which is somewhat of a matchmaking service for allocators of capital and asset management firms owned by women and people of colour.
This month, the Kresge Foundation and the John D. and Catherine T. MacArthur Foundation partnered with Lenox Park Solutions to survey and assess the racial and gender diversity makeup of the US asset management firms which invest $10.8 billion on their behalf. Those two foundations saw more power in collaborating, not only to increase their weight of assets but in a bid to make the process easier for managers and ensure results.
Other clients of Lenox Park Solutions include CalPERS, Texas Teachers and New York State Common.
“If there is one thing I think would really compel managers to be more transparent and respond at higher rates [on DEI issues] it will be some coordination on the asset owner side on how we ask these questions,” Lamin says, adding the best response results come from clients who ask questions with a tone of encouragement.
He says the industry needs to simplify or neutralise the weightiness of the subject and the burden that diversity has become in the industry.
“There needs to be an organic motivation to improve. The last thing we want is managers not wanting to participate in a survey on women and people of colour. We want to simplify the process of reporting and meet the market where it is.”
The Lenox Park Diversity Impact Score (LPI) is calculated using 10 components related to gender and ethnic diversity data for firm ownership, leadership, and total workforce. But the score is constructed so more components – such as disability, LGBTQ and gender pay equity – can be added as the data becomes available. Clients survey their managers collecting data to create the score that can be used as a benchmark for change. The score is shared with the client, and the underlying managers.
Unfortunately, however, this is not a good news story. On average, in order to be in 90th percentile for DEI a manager only has to score 4.5 out of 10.
But it is a starting point, and after all as this industry knows only too well, what gets measured gets managed.
“Things need to work themselves out organically but we need industry protocols and standard measures, and the impact scoring is a way of measuring where you are and what that looks like relative to the industry,” Lamin says. “The industry is great because it is metric driven, and there’s a competitive element to it. If there’s a generally accepted way of measuring this, then it can become competitive in there’s a path on how to make it to the top quartile. All funds managers want to figure out ways to differentiate themselves and show they are in the top quartile, this is a different measure for that. Our hope is that firms come back to us and say how do we improve this? That is where the real conversations start.”
The team led by Lamin – who has had a long career in finance including as director in Merrill Lynch’s fixed income structured credit group in New York where he was instrumental to asset management due diligence – has a number of goals for improving the influence of their impact score. The Roundtable Platform currently has client portfolios of $121 billion, which all have impact scores. The first step would be to increase that AUM so more portfolios can be measured.
On a weighted average when the impact scores are applied to those portfolios, the DEI impact is 11.7 per cent. So the second goal would be to improve the weighted average so that a higher percentage of those portfolios have impact on DEI.
“How do we go from 11.7 to 12.5 per cent or 14 or 18 per cent? There are two ways: allocators can find managers with higher impact scores and allocate to them; or they can go to their existing managers and say you have an impact score of 2.7 we want you to increase that. Managers can do that by hiring, retaining and promoting women and people of colour.”
While Lamin says there aren’t many industries getting it right when it comes to DEI there are certain intricacies in asset management that contribute to the poor metrics.
“Any time there’s more complexity in anything there are places to hide. One of the first things we hear from an asset owner that is reluctant to improve diversity is they have a fiduciary responsibility to generate returns. Once that conversation gets tabled, you introduce lots of ways to defer decision making or intentionality around it. People say “let’s do a study to see if women who manage private equity get the same returns as men” that kind of thing just defers and defers. Our industry is good at using complexity to shield price discovery.”
Lamin says conditions do matter and while the finance industry’s heritage as a Wall Street Boys Club may have changed on the surface, those cultures still run deep.
“We see it in jobs, trades and deals assigned, it’s still a very clubby network of men. Look at the people assigned to be on boards of private equity companies, it’s all white men,” Lamin says. “The major risk to an asset management firm is if they are not building an inclusive organisation then they will miss out on the best talent.”