If you're looking for diversity in asset management – whether it's by gender or race – you're going to have to look pretty hard to find it, according to a study commissioned by the John S. and James L. Knight Foundation.
The research looked at the number of women- and minority-owned firms and funds, as well as assets under management in mutual funds, private equity funds, hedge funds and real estate funds. Not surprisingly, the findings were dismal:
• Women- and minority-owned mutual funds represent just 5.2% and 3.8% of all mutual funds, respectively.
• Hedge funds managed by diverse-owned firms represent about 3.3% and 5.5% of all hedge funds.
• Among all active private equity funds (established since 2004), 2.1% are managed by women-owned firms and 3.8% are managed by minority-owned firms.
While real estate data were more difficult to find, women- and minority-owned funds represented just 3% of all real estate funds.
The lack of diversity can't be explained by poor performance, according to the study: "As a whole, the evidence suggests that the performance of funds managed by diverse-owned firms is statistically no different than the performance of those managed by non-diverse firms. In fact, diverse funds often have top-quartile returns, with 25% of women-owned and 28% of minority-owned funds in the top quartile, on average."
Why is diversity so rare in the asset management industry? "There's a variety of different barriers to entry for women and minorities," said Juan Martinez, the Knight Foundation's chief financial officer. "If you think about the life cycle of a financial services firm, the first stage is fundraising from friends and family. One issue that women and minorities face is that they may not have the social network or high-net-worth friends who can help in any material way."
Another is the pipeline of available managers to start new firms. "It's not common to have a lot of diversity in the portfolio management side of large asset managers," Mr. Martinez said. "If there's not that pipeline of portfolio managers, diverse firms get a double whammy."
Mellody Hobson, president of Ariel Investments and member of the Board of Governors of the Investment Company Institute, pointed out that women and minorities often are not exposed to asset management as a viable career path when they're young. "They don't grow up in homes where investing is discussed," she said. "They don't see a lot of people of color in those jobs."
And jobs in asset management don't consist of only portfolio managers: You need lawyers, accountants, marketers and corporate communications people as well, Ms. Hobson said. "Those are all areas where diversity can help."
Without people in all those areas, it's difficult for minorities to start a new fund, particularly in the current regulatory environment. "It's hard to start from scratch," Ms. Hobson said. "The barriers to entry are harder. At Ariel, it's combat every day: We're fighting for every dollar and take nothing for granted."
And, of course, people have biases and blinders. Ms. Hobson described a meeting that Ariel CEO and portfolio manager John Rogers had with prospective clients at which the clients said, , "We're looking for the next Jackie Robinson. And we have the current Jackie Robinson of investment management – John Rogers – sitting right there!"
The study analyzing the representation of women- and minority-owned firms in the U.S. asset management industry was performed by professor Josh Lerner of the Harvard Business School and the Bella Research Group.
The Knight Foundation, which manages about $2.2 billion, decided several years ago to increase its exposure to diverse-owned firms. Currently, about 22% of the foundation's money is managed by diverse firms. "We had two conditions: They should generate alpha and have institutional quality managers," Mr. Martinez said.