It’s Time to Mix Things Up

Di­ver­sity is a hot topic ev­ery­where in cor­po­rate Amer­ica ex­cept client port­fo­lios. That may change soon.

Financial Planning - - CONTENTS - BY AL­LAN BOOMER

Di­ver­sity is a hot topic ev­ery­where in cor­po­rate Amer­ica ex­cept client port­fo­lios. That may change soon.

I con­sider my­self a fis­cal con­ser­va­tive and a so­cial lib­eral. As an African-amer­i­can, I have long been sen­si­tive to is­sues like racial and gen­der in­equal­ity. The last 12 months have been po­lar­iz­ing in the United States, from the #Metoo move­ment to tiki torch-bear­ing white na­tion­al­ists to Black Lives Mat­ter and the NFL na­tional an­them protests. Our na­tional melt­ing pot is look­ing like any­thing but. In the past few months, my firm has re­sponded to a few com­pet­i­tive re­quests for pro­pos­als for projects in­volv­ing foun­da­tions and en­dow­ments.

Seek­ing Di­ver­sity in In­vest­ment

What’s strik­ing is that in the process we have en­coun­tered two un­re­lated or­ga­ni­za­tions that had a di­ver­sity state­ment within their in­vest­ment pol­icy state­ments. These or­ga­ni­za­tions have taken a stand when it comes to in­vest­ing in strate­gies de­vised by women or mi­nori­ties and funds that are owned by them. I be­lieve this is a trend that more ad­vi­sors need to be pre­pared to be able to dis­cuss with their clients. When I work with a new client, I al­ways build a cus­tom as­set allocation, but I tend to use the same un­der­ly­ing in­vest­ment ve­hi­cles. While this makes my life as an ad­vi­sor eas­ier, it is also lazy. I in­vest in funds and in­vest­ment ve­hi­cles that I know fairly well, and I have grown com­fort­able with them over time. Un­til these re­cent re­quests for pro­pos­als forced me to search for firms that were owned by women and mi­nori­ties, it never oc­curred to me that racial and gen­der equal­ity was an is­sue that I should be con­sid­er­ing in port­fo­lio con­struc­tion. Only 1.1% of the $71.4 tril­lion as­set man­age­ment in­dus­try is be­ing man­aged by firms owned by women and mi­nori­ties, ac­cord­ing to an in­dus­try re­port on di­ver­sity funded by the John S. and James L. Knight Foun­da­tion. That re­port also found that 25% of women-owned and 28% of mi­nor­ity-owned mu­tual funds per­form in the top quar­tile of their peer groups on av­er­age. In other words, these funds tend to per­form just as well as the in­dus­try av­er­age. With no sta­tis­ti­cal dif­fer­ence in the per­for­mance of women-owned and mi­nor­i­ty­owned funds, it is per­plex­ing why they are not man­ag­ing more money. Af­ter con­duct­ing its re­search, the Knight Foun­da­tion moved $472 mil­lion, or 22% of its en­dow­ment, into funds man­aged by women and mi­nori­ties. Some other in­sti­tu­tional in­vestors have made moves that are sim­i­lar. New York has cur­rently placed $11 bil­lion, or 6% of its pen­sion port­fo­lio, with mi­nor­ity- and women-owned man­age­ment firms. Mean­while, the state of Illi­nois has an as­pi­ra­tional goal that 20% of its $13.9 bil­lion pen­sion fund will be man­aged by mi­nori­ties, women and in­di­vid­u­als who

Two clients we are work­ing with had a di­ver­sity state­ment within their in­vest­ment pol­icy state­ments. I be­lieve this is a trend that more ad­vi­sors need to be pre­pared to dis­cuss with their clients.

have dis­abil­i­ties.

So why do ad­vi­sors ig­nore women owned and mi­nor­ity-owned funds? First, the money man­age­ment in­dus­try does not make it easy to screen for or iden­tify mi­nor­ity-owned and women-owned as­set man­agers. Most com­mer­cial data­bases do not track this data.

In pre­par­ing its re­port, the Knight Foun­da­tion had to cob­ble its lists to­gether us­ing a va­ri­ety of sources and data com­piled by or­ga­ni­za­tions like the Na­tional As­so­ci­a­tion of In­vest­ment Com­pa­nies, the Di­verse As­set Manag-ers Ini­tia­tive and the Robert Toigo Foun­da­tion. They also found valu­able data through the eVest­ment data­base.

Sec­ond, we have a ten­dency to fa­vor fund firms that are ei­ther house­hold

One rea­son this niche is ig­nored by in­vestors: The money man­age­ment in­dus­try does not make it easy to screen for mi­nor­ity- and women-owned as­set man­agers.

names, or firms that have proac­tive whole­salers who are in reg­u­lar commu-nica­tion with us.

And when we screen for new investments, we of­ten omit smaller firms and un­rec­og­nized names.

A Sur­prise in My Own Port­fo­lios

In look­ing at my own client port­fo­lios, I was sur­prised to re­al­ize that only one out of the 30 or so in­vest­ment ve­hi­cles that I rou­tinely track and rec­om­mend was man­aged by a per­son of color.

This is de­spite my firm hav­ing plenty of clients who are women and mi­nori-ties, and be­ing an eth­nic mi­nor­ity my­self. I don’t think I’m a racist or a sex­ist, but you could not tell by look­ing at my typ­i­cal port­fo­lio.

Thank­fully, one of the new clients we landed in the RFP process forced me to change my ap­proach.

Through in­ten­tion­ally look­ing for a group of di­verse man­agers, I was pleas­antly sur­prised to find a fund man­ager in Bal­ti­more whose small-cap growth prod­uct had a sub­stan­tially bet­ter track record than the one I had been us­ing pre­vi­ously. I also found a strong bond man­ager. By the time I had com­pleted my search, I was able to find a mi­nor­ity or women-owned man­ager for ev­ery as­set class in the client’s port­fo­lio. And, what’s even bet­ter, we did so without sac­ri­fic­ing man­ager qual­ity or re­turn po­ten­tial.

I am not say­ing that all ad­vi­sors need to run out and start adding these man­agers to their port­fo­lios.

But I am pre­par­ing you for what’s to come — more and more clients, from in­di­vid­u­als to foun­da­tions, will be ask­ing us ques­tions about the di­ver­sity of their in­vest­ment man­agers.

This is not an is­sue where we can con­tinue to be un­e­d­u­cated or caught flat-footed.

Only 1.1% of the $71.4 tril­lion as­set man­age­ment in­dus­try is be­ing man­aged by firms owned by women and mi­nori­ties, but their per­for­mance is in line with the in­dus­try. So it’s per­plex­ing why they are not man­ag­ing more money.

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