How our half a billion investment in minority-owned firms paid off: Knight Foundation CEO

  • We invested half a billion in women- and minority-owned firms.
  • Everyone said insisting on diversity on the investment side was was too risky.
  • The results will surprise you.
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When I was preparing to speak to a group of Black corporate directors several years ago, I was asked a straightforward question: How much money does the foundation I run invest with firms owned by women or minorities? We had recently made a $7 million investment in Lloyd Trotter's GenNx Capital Partners, but what else?

I didn't know the answer, so I called our CFO. He paused for a minute, and replied: $7 million. No, no, I said. Not just the new investment. What's the total amount of assets under management by women and people of color? And he said that, yes, the answer is still $7 million—on an endowment that was then $2 billion. That works out to just three percent.

I was surprised. And I decided we needed a new approach. Three years later, Knight Foundation's investment in diverse firms had soared to $200 million. Today, we have almost a half-billion dollars invested with diverse asset managers, roughly a quarter of our endowment.

How did we do it? And what did we learn?

Let's start with the obvious. It's no secret that finance has long been a white man's club. Even in 2017, as women and minorities make significant strides in the industry, managerial ranks remain remarkably homogenous. And, whether we're talking about hedge funds or mutual funds, private equity or real estate trusts, there is not a single field with more than 5 percent of its assets managed by minority or women-owned firms, according to a recently released Knight Foundation report.

This dearth of diversity in the top echelons of the industry can be self-reinforcing. Our previous investment strategy allowed for investing in minority and women-owned funds. Our approach was to invest in firms with a certain baseline of assets under management, and an established, long-term track-record. While individual asset managers may have had the requisite experience, ownership of firms by minorities and women was more recent, so they didn't meet the institutional ownership threshold. Working with Cambridge Associates, we developed a different approach, focused on talent and individual track records, a fit within the foundation's investment strategy, and a manager's ability to deliver results.

Everyone we talked to had the same reaction, solicited or not: insisting on diversity on the grants side of the foundation was one thing, but insisting on the same on the investment side was risky. We could lose money and appear to fail in our fiduciary obligation to care for the endowment. But we had faith that with careful screening, diverse funds could match the returns we were used to seeing.

They did match the returns – and slightly surpassed them.

Not everyone succeeded brilliantly. But our experience convinced us that, contrary to conventional wisdom, any investor can pursue diverse management strategies without sacrificing profits.

To make sure our experience wasn't an anomaly, we set out to study the state of diversity in asset management ownership. That study, carried out by Harvard Business School professor Josh Lerner and the Bella Research Group, confirms our experience: there is no discernible difference in how diverse and non-diverse funds perform. There is no performance gap to justify the substantial representation gap in fund ownership and management.

In some fields, such as private equity, female-owned firms make up a disproportionately large share of the top quartile earners. Minority-owned hedge funds have seen similarly strong returns. It shouldn't be breaking news that, when given the same opportunities as white men, women and minorities can, and do, perform just as well.

Yet, even as the number of diverse-owned funds continues to rise, their overall presence in the financial industry remains low. According to the report, just 1.1 percent of the $71.4 trillion assets under management across the world is in the hands of women and minority-owned firms. In a field of philanthropies and educational institutions that profess to value inclusion and equality, innovative people and ideas, the data suggest emotional behavior by people who are making decisions to hire only people who look like themselves or whom they've known for a long time.

If you take anything from our experience, let it be this: there is no legitimate reason to not invest with diverse asset managers in the 21st century. Our decision to invest nearly $500 million with diverse managers was not an act of altruism. We believe diversity and inclusion in the workplace leads to broader-based, smarter decision-making. That includes investments. And that's a lesson for everyone.

We carried out our diversity investments with two goals in mind: make money and do the right thing. Our new study shows they go hand-in-hand.

Commentary by Alberto Ibargüen, president, CEO and a trustee of the John S. and James L. Knight Foundation.

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