Increasing Diversity in Asset Management Firms for University Endowments
Briefing Memo: Increasing Diversity in Asset Management Firms for University Endowments
April 6, 2018, 11:00am – 1:00pm
The Torch Club, New York University
“Organizations that are serious about diversity and inclusion take deliberate actions to aid diversity and inclusion.” — John Rogers Jr., Chairman and CEO, Ariel Investments
Thank you for participating in “Increasing Diversity in Asset Management Firms for University Endowments,” co-hosted by the NYU Stern Center for Business and Human Rights, RFK Human Rights, and the Diverse Asset Managers Initiative (DAMI).
The purpose of this meeting will be to explore practical ways to increase opportunities for investment firms that are owned by women and under-represented minorities to participate in the investment strategies of university endowments. We have invited university trustees and investment officers, and other thought leaders to participate in this informal, off-the-record discussion that will be moderated by Lewis Kaden, the Chair of our Center’s Advisory Council and the former Chief Operating Officer of Citigroup.
North American investment managers oversee more than $70 trillion in assets. Yet in 2018, firms owned by women or under-represented minorities manage only 1.1 percent of those assets, according to research commissioned by the John S. and James L. Knight Foundation. Our aim is to begin to address the dramatic under-representation of women and minorities in senior reaches of the investment sector by focusing on North American university endowments that hold approximately $500 billion in assets. American universities and colleges now routinely make diversity a priority in their student bodies, faculty, and leadership. But the same commitment to diversity has yet to be extended to their investment practices. We believe that if they were to do so, their actions would encourage the growth and proliferation of such firms, spurring progress throughout the wider investment community.
Studies by McKinsey & Co. and others show that companies with more diverse workforces typically perform better financially. To date, there is no research on university hiring of money-management firms owned by women and minorities. “In an industry that thrives on data, we need more and better information on diverse ownership” of investment firms, says Professor Joshua Lerner of the Harvard Business School, who oversaw the study commissioned by Knight. “The more we learn, the clearer it is that there are vast and hard-to-justify disparities in asset management.”
Progress to Date: The University of Chicago Model
At our April meeting we will be briefed by representatives of the University of Chicago investment team and two members of the University’s Board of Trustees. They will describe recent steps taken by the University of Chicago, which has in the past several years significantly expanded opportunities for investment firms owned by women and under-represented minorities while maintaining excellent financial returns. Led by Robert Zimmer, the University’s President, and Mark, the University’s Chief Investment Officer, Chicago sought out and hired diverse-owned firms beginning in 2011. Currently women- and minority-owned firms manage about $900 million, or 11 percent of the school’s endowment assets.
The University has used a variety of strategies to achieve and sustain greater diversity in the ranks of its asset managers. For example, it sponsors an Annual Professional Services Symposium, a two-day event during which diverse-owned firms in finance, law, accounting, and other fields can interact with University administrators, making the sort of personal connections that lead to business relationships. Now in its ninth year, the symposium specifically facilitates one-on-one networking opportunities during which outside firm owners can share their strategies and pitch their services.
The University also is involved in an innovative program run by Northern Trust, a Chicago-based financial services company. On the university’s behalf, Northern Trust vets asset managers based on such metrics as investment performance, appetite for risk, community involvement, and employee diversity. The University’s Investment Office then uses scores generated by Northern Trust as a factor in its hiring decisions. The Northern Trust program doesn’t focus specifically on diverse ownership, but its criteria help to highlight the strengths of women- and minority-owned firms.
Mr. Schmid oversaw investment of employee-retirement money at the defense contractor Boeing before coming to the university in 2009. Often subject to federal subcontracting requirements, which put a premium on the hiring of minority-controlled firms, Schmid told us that at Boeing he “did this stuff all the time.” Schmid told us that a combination of personal leadership, deliberate networking, and innovative screening practices have allowed the University of Chicago to more than triple the percentage of women- and minority-owned investment firms its endowment employs in just over seven years. We think that others schools can learn from the University of Chicago example and develop similar models that both enhance opportunities for minority- and women-owned investment firms and achieve great competitive financial returns.
The Way Forward
Universities are thought leaders in our society and often lead by example. Prominent American universities have raised significant scholarship funds in the last several decades to allow need-blind admissions and greater racial and economic diversity in their student bodies. In recent decades they have made concerted efforts to broaden the diversity of their faculties and senior administrators. They also are at the center of broader public debates about the need for greater diversity and inclusion throughout our society. On the business side, these same universities routinely seek out and employ minority-owned firms to fulfill core business needs, such as campus maintenance, catering, and security. The one glaring exception to this commitment has been their failure to select outside firms owned by women or under-represented minorities to invest their endowment dollars.
We believe other leading universities can and should aspire to achieve the same success in diversifying their rosters of money managers as the University of Chicago has done. A logical first step will be to obtain and analyze a list of firms each school now uses and the financial scope of the schools’ investments. Once we have such information in hand, we will be in a much better position to see where more work needs to be done.
We then hope to work with each of you to craft effective strategies to change existing practices at the schools you represent. We also hope to provide you with the tools to make the case. Over the next six months, we will continue to conduct studies that add to the existing research and demonstrate the value more diverse money managers bring to university investment efforts.
Values-Based Investing