Women and Minority Investment Managers Get Little Business From Foundations, Study Shows

Despite having investment performance that is on par with that of their peers, women and minority-owned firms control only 1 percent of the $71 trillion in assets at the nation’s financial firms, according to a study released today.

The John S. and James L. Knight Foundation commissioned the study because it wanted to increase the diversity of the portfolio managers it invests with, said Juan Martinez, Knight’s chief financial officer. Doing so, he said, could help the foundation’s endowment grow and simultaneously accomplish its broader goals of fostering diversity and inclusion.

“I would love it if the financial world was more representative of society as a whole,” he said. “Women and minority managers are underrepresented in the field.”

The study defined firms as women-owned or minority-owned if those groups had at least a 25 percent stake in the firm. It tracked mutual funds, hedge funds, private-equity funds, and real-estate portfolios.

Among mutual funds and hedge funds, about one-quarter of women- and minority-owned firms scored investment returns in the top quartile of the broader universe of asset-management firms. In private equity, women were overrepresented, with one-third of firms scoring returns in the top quartile. Minority-owned private-equity firms were underrepresented among top earners, with about 20 percent landing in the top quartile.

The study, which was conducted by Harvard Business School professor Josh Lerner and the Bella Research Group, used several databases to compile information in each asset class. Because there are different definitions of what constitutes minority ownership and the asset databases may not be comprehensive, the study’s authors acknowledge the findings may have a bias toward larger, better-known firms.

Competitive Advantage

Knight first investigated its own record of diversity in the asset managers it invests with in 2010. Out of its entire portfolio, it had only invested $7 million in one minority-owned fund. Now, according to Mr. Martinez, it has placed $472 million, or 22.5 percent, of its endowment holdings in women- or minority-owned firms.

Mr. Martinez said the use of women and minority asset managers can bring a competitive advantage that is sometimes obscured by the traditional process of choosing investment managers. Often, he said, investment teams have policies against placing assets with managers whose portfolios are below a certain asset level or who have not compiled a lengthy track record. Often, women and minorities own smaller, less-established firms.

By increasing the diversity of fund ownership, Mr. Martinez hopes to benefit from different investment approaches. Policies that screen asset managers by fund size and other factors can effectively mitigate risk, he said, but can also exclude newer and perhaps more innovative firms. “If you’re looking at the same people who look at the world the same way, you’re screening out people who might have an idiosyncratic approach that might lead to outperformance” of their investing peers.

Clarification: The headline on this story has been changed to better reflect the results of the study.