Foundations Struggle to Show Diversity in Hiring Money Managers

Four years ago, Alberto Ibargüen was asked during an investment committee meeting whether the John S. and James L. Knight Foundation, which he heads, had any of its endowment invested with minority-owned firms.

Mr. Ibargüen knew about a $7-million placement with one company, and he assumed there were several more. After all, the foundation had a policy of giving preference to minority-owned companies, all else being equal.

He checked with the foundation’s CFO and the answer came back: $7-million. Total. Of the foundation’s $2.1-billion in assets (now $2.4-billion), only three-tenths of 1 percent were being managed by minority-owned firms.

“What is it about white males that makes them exclusively able to do this kind of work?” Mr. Ibargüen wondered. He posed the question to Kevin Stephenson, a consultant with Cambridge Associates, who serves as the foundation’s outsourced chief investment officer, and asked him to search for more high-quality minority-owned firms.

That nudge has led to a big change. Knight now has $323-million invested with minority- or women-owned firms, roughly 14 percent of its assets.

Other foundations, including the W.K. Kellogg Foundation and the Silicon Valley Community Foundation, are also consciously seeking out a greater number of women- and minority-owned firms to help manage their endowments. Advocates for greater diversity in investment management say foundations have lagged behind public and corporate pensions in seeking out more-diverse managers.

But that may soon change. Foundations that once kept quiet about their efforts are beginning to speak out. Mr. Ibargüen will outline Knight’s progress at a speech at an Independent Sector meeting this week. Emmett Carson, Silicon Valley’s chief executive, wrote an essay in February about investment-management diversity, calling it “The Hardest Taboo to Break.”

Risk Assessment

Progress Investment, a “manager of managers” that has helped Kellogg identify and hire up-and-coming minority- and women-led investment firms, recently published a case study on the effort. The Association of Black Foundation Executives is sponsoring a webinar featuring the Kellogg case study on November 20.

“A lot of people will tell you, ‘We would do it, but we don’t want to take the risk,’ ” says Mr. Ibargüen. “The risk is opening your mind. Cambridge has shown that managers are out there who are every bit as qualified. If there’s a will to do it, we think we’ve found a way.”

Chief Investment Officer magazine published an article in September called “Whiteout: The Staggering Sameness of Asset Managers.” The author found that nearly 90 percent of asset managers are white and roughly three-quarters are white men. African-Americans and Latinos make up 28 percent of the nation’s work force but hold only 3 percent of top investment roles, the author found.

Mr. Carson, who is black, says he has repeatedly witnessed foundation board members who champion diversity in grant making and hiring “turn silent when the topic changes to investment-manager diversity.”

Many board members have an unstated assumption that hiring diverse firms will hurt investment returns, Mr. Carson says, and outside consultants may share similar biases.

Mr. Carson challenged Silicon Valley’s consultant, Mike Miller of Colonial Consulting, to review his firm’s procedures for insuring that minority firms weren’t overlooked. Mr. Miller, the co-author with Mr. Carson of a piece on investment-management diversity, described the number of minority-owned firms that had been vetted or recommended by Colonial as “surprising and disappointing.”

Colonial, which advises on $30-billion in assets, primarily at nonprofits, has since changed its processes to better track firms that are owned by minorities and to insure that every search begins with a diverse set of managers in the mix.

Silicon Valley has about $6-billion in assets, but it controls the investment-management function, in consultation with Colonial, for only about $1.5-billion of those assets. Some $106-million of that total is now managed by minority- or women-owned firms.

“Part by part, we’ll get to where we’d like to be,” Mr. Carson says. “We’re not at a horrible place, but we’re not where any of us feel we could be with the new approach.”

Removing Barriers

At Kellogg, the diversification effort is a conscious attempt to apply the mission of the $8-billion foundation to money management. One of the foundation’s five focus areas, racial equity, focuses on removing barriers to success faced by children of color.

Yet until Joel Wittenberg arrived as chief investment officer in 2009, very few minority-owned firms were winning assignments to help manage the fund’s $3.5-billion in diversified assets. (The foundation holds another $4.5-billion of legacy Kellogg Company stock.)

In 2010, Kellogg committed $100-million to a program in which it works with Progress Investment to identify diverse emerging managers. Those investments, with about eight managers, now total $110-million, roughly 3 percent of the $3.5-billion that isn’t tied up in Kellogg stock.

“We had a racial-healing effort,” says Joanne Krell, a foundation spokeswoman. “We have to ask ourselves the question, How are we living that value every day? We’ve got to start somewhere, including looking at aspects of race, equity, and inclusion and making sure that we are walking the talk.”

Rigorous Review

Officials at Kellogg, Silicon Valley, and Knight say their efforts are about ensuring equality of opportunity. Once managers are hired, they’re subject to the same reviews that all managers face. One minority-owned manager hired by Kellogg recently outperformed its benchmark by 3 percentage points. But a Kellogg investment in a minority-owned hedge fund lost money when the firm closed due to poor performance.

“You really need management support for this,” Mr. Wittenberg says. “We’re going to have firms that don’t make it. That’s part of the game. The board has been very supportive. In the good quarters, that’s easy. And in the bad quarters, they’re 100 percent behind it as well.”

Knight eliminated one minority-owned manager as a result of a shift in asset allocation and fired another for poor performance. “They’re subject to the same rules of the road,” Mr. Ibargüen says. “This is not being done as a charitable act. We’re not in the business of giving charity to people who are already reasonably wealthy.”

One risk to the efforts like the one at Kellogg, in which a small portion of foundation assets are designated for minority managers, is that consultants and investment committees may overlook minority-owned firms for even bigger assignments.

Tedd Alexander, an African-American money manager in Baltimore, wrote an essay in May in which he described why he doesn’t identify his firm, Credo Capital Management, as minority-owned in presentations and marketing materials. “How are minority managers expected to succeed and thrive when their market opportunity is artificially diminished?” he wrote.

Going Small

Mr. Wittenberg says Kellogg is intentionally seeking small up-and-coming minority-owned firms with modest allocations averaging about $15-million but that it will eventually consider top performers for bigger assignments. “If we made full allocations, that might overwhelm these firms,” he says.

Progress Investment and the Association of Black Foundation Executives argue that expanding investment-management opportunities for minority managers will eventually bolster philanthropy, too. Progress, a 24-year-old company, maintains a goal of giving 5 percent of net profits to charity, says Thurman V. White Jr., the company’s president. Well-known black investors John W. Rogers Jr., in Chicago, and Eddie C. Brown, in Baltimore, are generous philanthropists in their own communities.

“As new managers are hired,” Mr. White says, “we’ll create another cadre of philanthropic contributors.”