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Chronicles of an Allocator

Chronicles: June 2021

Issue 16, June 2021

Dear Investment Professional,

It’s been widely acknowledged throughout the investment industry that increased diversity leads not only to better business outcomes¹ but also to better investment outcomes too. Nevertheless, the rate of change in diversifying the racial and gender make up of our industry and our portfolios continues to be slow. Several organizations, like CAIA Association², have recently issued statements and taken initial steps to build diversity, equity, and inclusion (DEI), yet the question remains: how can our industry’s leaders build the processes and encourage the long-term cultural changes required for genuine transformation in these areas?

This issue of Chronicles features articles and webcasts that explore the state of DEI in asset management and the ways that the industry can better welcome and advance new, more diverse voices and talents.

The CAIA Content Team

John L. Bowman, CFA, Senior Managing Director, Twitter, LinkedIn

Keith Black, PhD, CFA, CAIA, FDP, Managing Director Content Strategy, Twitter, LinkedIn

Guowei Jack Wu, CFA, CAIA, Content Director, APAC, Twitter, LinkedIn

Aaron Filbeck, CFA, CAIA, CIPM, FDP, Director, Global Content Development, Twitter, LinkedIn

In other news...

Chart comparing female employees in alternatives

Small gains are still not enough

At end of 2020, according to a recent report from Preqin, despite representing half of our global population, women made up only 20.3% of the alternative investment workforce, marking a slight but positive jump from 19.7% at the end of 2019. The percentages fall even lower for women in senior positions, with the highest representation, though still small, at 13.7%, in venture capital relative to other asset classes. Ownership stakes also remain deeply skewed; in the Table Stakes study by Carta³, as of 2020, women own only 47 cents on every dollar of equity that men own, with no significant gains in the last couple of years. On the topics of improving pathways for women within global education systems and increasing workplace flexibility for both men and women, a roundtable of industry experts, in a webcast convened by CAIA Association last month,⁴ recently shared their views on what’s required to more quickly move the needle for women. Watch the webcast to learn more.

Myths about women as investors

From a lack of interest or confidence to an outsized aversion to risk, women across our industry must often combat several potentially damaging stereotypes when asserting their investment abilities against their male counterparts. A recent post on Enterprising Investor overturns these and other “myths” about women investors and highlights evidence that suggests that many of the supposedly negative traits attributed to women investors can actually lead to their outperformance.

Chart displaying percentage of European and American firms disclosing

Unspoken barriers for women in APAC countries

Like in other regions, women in APAC countries say they too confront biases and unequal pressures—such as the need to “dress the part”—in their work in the investment industry. In a CFA Institute survey from 2020, women interviewed in Australia, Mainland China, Hong Kong SAR, India, South Korea, and Singapore identified key barriers to improving gender diversity across the region. According to the survey, only 18% of women reported being active about advocating for gender diversity. In addition, respondents note that there are fewer female role models, as well as insufficient training on gender diversity, in the industry. The good news for the region? More than half of those surveyed “said they are optimistic gender equality can be achieved in the next 10 years” while 76% believed that workplace diversity leads to better business outcomes.

Engaging on racial inequality

Although investor engagement has created momentum on many fronts—such as tackling climate change or improving gender diversity across industries—less progress has been made on promoting racial equity, particularly for Black men and women. According to a report by Aviva Investors, among white employees, there remains a “state of ignorance” and gap in discussion around the lack of Black representation in the business community, caused by four main factors: the difficulty for Black employees to speak out, the lack of awareness or recognition of privilege from white employees, the focus on gender equality, the tendency for Black people to be categorized alongside Asian minorities, and the continued class discrimination at blue-chip companies. “We need to be comfortable saying ‘black’ and put the mindset out there that it’s not simply a quota for the sake of it,” says Aviva Investors’ Elizabeth Atoyebi. “It is a quota to access qualified people who might bring different viewpoints and more diversity to the way the business is run and the way it thinks.”

The “cognitive diversity cop-out”

In her recent column for CityWire, Sloane Ortel writes about the “fashionable” tendency for asset management organizations to bypass action on DEI by instead claiming the importance of cognitive diversity, which “usually refers to differences in working, problem-solving, learning, and personality styles.” While this form of diversity is undoubtedly important, she argues, “the ‘cognitively diverse’ people they point to are neurotypical, able-bodied, and Caucasian.” Moreover, many managers who claim this cognitive diversity also do not have metrics or processes in place to measure their efforts in this area. Rather than default to these arguments, Ortel argues that managers should simply acknowledge the difficulty and ongoing complexity of creating genuinely diverse, inclusive teams and admit they won’t get it right all the time.

Bar chart displaying likelihood of financial outperformance by gender

The role of the RFP in starting the diversity conversation

Especially since the summer of 2020, when the death of George Floyd in the United States sparked a massive push for greater DEI across the industry, the biggest LPs in the country have upped the stakes for asset managers in their portfolio. According to a recent article by Institutional Investor, many have redoubled their efforts to encourage both current and prospective managers to report on their firm’s diversity-related efforts and metrics in lengthy questionnaires and throughout the RFP process. A potential takeaway for GPs: it’s no longer acceptable to leave these questionnaires blank.

Diversity as part of quality

Last year, McKinsey’s report, Diversity Wins, showcased a significant correlation between diversity in executive teams and financial outperformance across corporations worldwide. According to a recent podcast by Lazard Asset Management,⁵ thanks to emerging empirical data like this, investors might now think of both gender and ethnic diversity as part of the quality premium. In other words, diversity can play a demonstrable part in helping companies build the competitive advantages that lead to profitability. So, what’s stopping companies from taking action or measuring progress? Perhaps the short-term focus on quarterly returns, as well as the embarrassment of many leadership teams surrounding their current diversity statistics, are hampering the long-term, persistent efforts required to create more diverse, inclusive work environments. Globally, there’s also a need for greater multistakeholder momentum, from governments, companies, investors, and consumers alike, in working together to advance diversity.

COVID-19: An unequal impact

The COVID-19 pandemic took a persistent societal problem—racial, ethnic, and gender inequality—and made it much worse. Racial and ethnic minority groups in the United States have faced an increased risk of severe illness or death from COVID-19. In addition, such groups, along with women, have been overrepresented among front-line workers who were most directly impacted by the pandemic, such as those in retail, hospitality, recreation, and manufacturing. When comparing race and gender in the United States, Black women saw the greatest drop in employment during the pandemic. According to a recent series of articles by Hermes Investment,⁶ though the widened gaps in inequality are disheartening, the pandemic also offers organizations a chance to “reset working habits” and ensure greater inclusion and flexibility in their decision-making processes for the benefit of these groups.

Referenced Materials:

Why Diverse Teams Are Smarter
Diversity, Equity, and Inclusion Initiative - CAIA Association
2020: A Study Analyzing Equity Distribution By Gender, Race & Ethnicity, & Geography
Preqin Impact Report on Women in Alternatives: A discussion with CAIA Association
The Question Is…Should Investors Worry about the Glass Ceiling?
How the pandemic has impacted gender inequality

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All posts are the opinion of the contributor. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CAIA Association or the contributor's employer.