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Front Page » Top Stories » Tiny gain for minorities in asset management

Tiny gain for minorities in asset management

Written by on December 14, 2021
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Tiny gain for minorities in asset management

The Knight Foundation’s third edition of its diversity of asset management research report has once again shown a dramatic underrepresentation of minority and women-owned firms in management of assets, but with a slight improvement that promises to continue to grow.

Written by Professor Josh Lerner from Harvard University’s Business School and Rahat Dewan from Bella Private Markets, the John S. and James L. Knight Foundation commissioned its third study – the others were published in 2017 and 2019 — to analyze diversity among ownership and management of asset in mutual funds, hedge funds, private equity and real estate on a sample size of 10,008 US-based firms with a total of 31,763 funds and $82.24 trillion assets under management (AUM).

The study found that non-diverse owners (white males) of all those asset classes hold 98.6% of assets, compared to 1.4% who are demographically diverse. Within that 1.4%, 0.04% of owners and managers in the whole industry hold hedge funds, 0.99% own or manage mutual funds, 0.37% own or manage private equity and 0.04% own or manage real estate.

“It is disappointing, but not unexpected,” said Juan J. Martinez, vice president and chief finance officer and treasurer of the Knight Foundation. “We have seen anecdotally that the opportunities within the industry for diverse-owned firms have been small and this is reflective of that. There are a lot of factors, specifically around issues of incumbency, issues of size and issues of opportunity that we think have led to this sort of concentration of assets in non-diverse firms.”

The Knight Foundation has invested $931 million in diverse-owned firms, representing 37% of its endowment as of Dec. 31, 2020. Those firms include Ariel Investments, Brown Capital, Pugh Capital and LM Capital, according to a press release.

Last year, the foundation gave 381 grants and distributed $123,809,334 “to create informed and engaged communities towards the goal of a more effective American democracy.”

“We are investors,” said Mr. Martinez, “and for us, the proper successful investment of those assets means a lot. But we are also an organization that cares about our community, that lives in our community, and that serves our communities.”

In 2010, he said, the Knight Foundation CEO Alberto Ibargüen was asked at a conference about the level of diversity within the foundation’s endowment. “And what we found was that the endowment at that time had a commitment of $7.5 million to one African American-owned firm. And that was it. And we thought, that could not be the case.”

“So, immediately what we did was to look at our own internal processes on the investment side and to try to understand what we were doing that we could change,” he said. “Over that period of time, we’ve gone from a very small amount of money to about a billion dollars, and about a third of our portfolio being managed by diverse-owned firms.”

Data from the US Census Bureau for the 2020 Census showed that the Black American population rose 5.6%, the Asian American population rose 35% and Hispanic American population rose 23%, while the White American population has declined about 9%. Diverse-owned firms managing only 1.4% of assets, said Mr. Martinez, is problematic.

“The investment management field… generates an amazing amount of wealth for its asset managers, and in the capital decisions it makes, it supports and provides opportunities to the whole economy,” he explained. “So if the asset managers, those that are allocating and making investment decisions, aren’t representatives of the whole community, you can argue that there are investment opportunities that aren’t being identified and that there are opportunities for growth within the communities that aren’t receiving sufficient capital allocations.”

The research also showed that the percentage of diverse-owned assets under management grew from 1.0% to 1.4% between 2016 and September 2021. Although it has slightly improved, it is doing so at a very slow pace, the report said.

In addition, there is a high underrepresentation in the amount of capital controlled by minority groups. The study suggested that “although there may be a relatively large number of minority-owned firms, the size of the firms is much smaller than their non-diverse owned peers.” For example, the highest percentage within each asset class held by minority-owned firms are hedge funds and mutual funds, at 9.3% and 9.2% respectively, but 9.2% of diverse-owned firms that manage mutual funds only hold 0.4% of the industry’s funds.

The highest representation for women-owned firms is among private equity and mutual funds at 7.2% and 6.7% respectively. But again, they manage only 1.6% and 0.6% of the industry’s funds.

“You can see that that has significant consequences,” said Mr. Martinez. “Real estate funds, for example, which are very capital intensive, is the area where you have the least amount of representation or diversity. That’s an indicator that it is harder for diverse-owned funds to get large allocations of capital and it becomes almost like a self-fulfilling prophecy in which, because they are smaller compared to their peers, many large asset allocators will not allocate capital to them.”

The average fund size by any asset class is significantly larger – in most cases, double – for non-diverse-owned firms. For example, non-diverse firms manage $4,761 million in all asset classes, compared to the $2,194 million that women-owned firms manage and the $911 million that firms owned by other minorities manage, said the report.

As an allocator of asset, such as the Knight Foundation, Mr. Martinez said that firms and organizations have to understand the criteria for making an investment. “In the cases of these smaller diverse-owned firms,” he said, “there is an opportunity to build a relationship early and then secure an amount of access to that firm so that as they continue to grow, you continue to make allocations to them and to grow your allocations.”

Even though representation is still lagging across all of the asset classes, diverse representation in terms of assets under management has increased, particularly for private equity and hedge funds, according to the research. Similarly, it is increasing in a faster pace than non-diverse firms are.
“Minority-owned funds in particular experienced rapid growth,” said the report, “with a compound annual growth rate (CAGR) of 27.4% in private equity, and 6.6% in hedge funds, far outpacing the growth of non-diverse owned AUM.”

In real estate, women-owned firm AUM has increased more rapidly than their non-diverse-owned peers, with a 26.7% CAGR, compared to 16.1% of CAGR for non-diverse firms.

The research also showed that private equity assets under management managed by minority-owned firms was just above 2% in 2011, and in 2021 is 4.5%. Hedge funds AUM by minority-owned firms was about 1.8% in 2011 and now is 3.4%. In the case of women-owned firms in hedge funds, they encompassed 1% of the industry in 2011, and now they manage 2.2%.

“Diverse firms, whether they’re women or demographic diversity,” said Mr. Martinez, “perform at least at an equal level, statistically, as non-diverse firm owners. We don’t find any statistical evidence that supports the idea that there is any kind of performance concession to diversity.”
The hope of this research, he said, is that as more data become available and asset managers provide more information in terms of firms’ diversity and the diversity of the recipients of its allocations, it becomes easier of others to study this field.

“There are signs of hope,” said Mr. Martinez. “We recently published another study on foundations, their investments and the diversity of their portfolios. We found out that about 16% of their US-based assets on average were being invested with diverse-owned firms.”

That report, along with the full research report on the diversity of assets under management, can be found on the Knight Foundation’s website under the Research tab.

“These very professionally managed portfolios are striving for higher diversity,” Mr. Martinez said. “We think that’s an indicator of a trend that might be emerging.”

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