This post by Kerin McCauley, of NYU Stern, is part of a series in which IEN members and network partners share their thinking about intentional endowment investing to address racial injustice and other diversity, equity, and inclusion themes. Follow along to read members' insights into DEI and the "S" factor in ESG."

Kerin K. McCauley, Senior Associate Director, Center for Business and Human Rights, NYU Stern School of Business

For the past two years, the NYU Stern Center for Business and Human Rights has been partnering with the Diverse Asset Managers Initiative and Robert F. Kennedy Human Rights to promote greater diversity among asset managers who are investing university endowment funds. 

U.S. university and college endowments now hold in excess of $600 billion in assets. University investment offices are not required to disclose information about the firms they select to manage their endowment dollars, so data reflecting university hiring of money management firms owned by women and people of color is not widely available. A 2019 study commissioned by the Knight Foundation does provide useful data from the investment sector in general. The study found that in the $69 trillion asset management industry, firms owned by women and people of color manage only about 1.3% of assets. This study, as well as research from McKinsey & Co., find that there is not a statistically significant difference in performance between diverse-owned asset management firms and their non-diverse-owned peers. In fact, the Knight Foundation study demonstrated that funds owned by women and people of color were overrepresented among the top 25% of performers in their asset classes. 

In a moment when the nation is responding to recent murders of more Black men and women at the hands of police and higher rates of Covid-19 deaths in Black communities, universities should review all aspects of their business models for symptoms of bias and racism. The dramatic underrepresentation of Black, Indigenous, and other people of color, as well as all women, in the upper echelons of the investment sector is, at least in part, a result of common industry practices that are affected by systemic racism and unconscious bias. These practices include heavy reliance on internal networks and RFP qualification requirements that exclude fund managers who may struggle with early rounds of fundraising based on the wealth of their own personal networks. 

Research out of Stanford University undercuts the common suggestion that the lack of diversity in asset management for institutional investors is mainly a pipeline problem. A paper titled “Race influences professional investors’ financial judgments” indicates that asset allocators struggle to evaluate racially diverse managers, and that Black-led funds “face the most barriers to advancement after they have established themselves as strong performers.” Historical developments that blocked Black Americans from access to capital, such as the GI bill and residential redlining, provide context for asset allocators to understand why revisiting screening practices is necessary if they want to ensure they do not overlook talented firms. The number of women in the investment sector decreases in senior positions, and while there may be multiple factors at play, research provides evidence that gender bias impacts investment decisions.

Universities’ efforts to address diversity and inclusion tackle shortcomings in the admissions process, in campus culture, and in representation among faculty and staff. Some university procurement teams have implemented strategies for identifying firms owned by people of color when hiring for certain professional services, such as catering, campus maintenance, and security. All these efforts are steps in the right direction and enhancing diversity on each of these fronts is crucial. However, if universities are serious about addressing racial and gender inequities, selection of the asset management firms with which they invest their endowment dollars requires further attention and action.

In 2018, the Center and its partners co-hosted a convening of representatives from 13 large university endowments—Brown, Caltech, Georgetown, Harvard, NYU, Northwestern, Princeton, University of California, University of Chicago, University of Michigan, Penn, Williams, and Yale. The agenda focused on understanding current challenges to enhancing diversity among fund managers and developing a common strategy to address them. A key outcome from this meeting was recognition that universities should systematically track and report on diversity of fund managers. A business maxim states, “When performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates.” With better data on university hiring of diverse-owned fund managers, we can establish a standard for the percentage of a portfolio that investment offices should expect to have under management by diverse-owned firms. We can also begin to develop metrics to track improvement. The University of California set an example for its peer institutions when it released a December 2019 report detailing the percentage of its endowment managed by diverse-owned firms. 

Our Center is administering a survey to gather diversity data from the 30 largest university endowments, which represent more than half of assets under management by all U.S. universities and colleges. We are also exploring how progressive actions already underway at a few universities might be employed by any university that wants to help lead this reform. Top-tier schools with large endowments have a unique opportunity to leverage their role as social and economic leaders, setting an example not just for other universities but for the investment sector at large. 

Enhancing diversity among fund managers will require reimagining how business is conducted and creative solutions for network expansion to ensure that investment teams are not missing opportunities to work with high-performing diverse managers. In the economic strain following the outbreak of Covid-19, it will be tempting for university investment committees to de-prioritize diversity. Despite competing concerns, if university presidents, CIOs, and trustees call for tracking and reporting of high-level diversity data and engage in conversations about strategies for progress, together we can begin to identify new talent and take another step toward real equality of opportunity.