House Financial Services Subcommittee Hearing on Diverse Asset Managers
House Financial Services Subcommittee on Diversity and Inclusion
“Diverse Asset Managers: Challenges, Solutions and Opportunities for Inclusion”
Tuesday, June 25, 2019
Key Topics & Takeaways
- Unconscious Bias: Martinez explained that there is a “power to incumbency,” as consultants favor the firms they know well and have longstanding relationships with, saying it is important for customers to express the importance of diversity to their consultants. Chia agreed and added there is a personal risk for consultants to make decisions with an unknown manager and it is safer to recommend a known manager. Rogers said that the customer must demand the consultant live up to their values. He added, however that “outstanding performance” can overcome bias.
- Rooney Rule: Beatty asked the panelists if they would support a “Rooney rule” for asset managers, such as her proposed legislation, the Diverse Asset Managers Act. All panelists replied that they would.
- Increasing Access: Jones said educating investors and asset managers about the importance of diversity, as well as creating a pipeline of girls and people of color at a young age, are essential. She emphasized the importance of encouraging firms to disclose their diversity data, saying it is important for consumers to make informed decisions and for firms to track their progress. Miller-May said that diverse asset managers need to build relationships before an investor is searching for a manager, so the investor knows who they are working with and understands their track record.
- Reporting Requirements: Adams asked if companies should be required to share their diversity data, including their use of diverse asset managers. All panelists replied that they should.
- Juan Martinez, Vice President/Chief Executive Officer and Treasurer, Knight Foundation
- John Rogers, Chairman, CEO & Chief Investment Officer, Ariel Investments
- Brenda Chia, Founding Board Member & Co-Chair, Association of Asian American Investment Managers (AAAIM)
- Angela Miller-May, Chief Investment Officer, Chicago Teachers’ Pension Fund
- Meredith Jones, Investment Researcher and Author
Chairwoman Joyce Beatty (D-Ohio)
In her opening statement, Beatty said the “stark” lack of diversity in asset management is an often-overlooked problem, and that while affluence continues to accumulate for many, access to opportunity remains unavailable for an entire group of financial professionals who have been left out of the system. She said that according to a Harvard Business School study, majority diverse-owned firms represent less than one percent of assets under management in four asset classes: mutual funds, hedge funds, private equity and real estate, though empirical research shows there is no statistical difference in performance between diverse-owned firms and their peers, even when adjusted for risk and compared to public market returns. Beatty said it is important to highlight solutions and opportunities for greater inclusion in order to increase the participation of women- and minority-owned firms and help close the “ever-widening” wealth gap.
Ranking Member Ann Wagner (R-Mo.)
In her opening statement, Wagner said that despite massive growth in the asset management sector, women and minorities are underrepresented, particularly in the management of mutual funds, hedge funds and private equity. She said that in 2016, only 1.1 percent of U.S. assets were managed by women- or minority-owned firms, which increased to only 1.3 percent by 2018. Wagner said there are four ways to increase access to funds for minority- and women-owned firms: leadership commitment, removal of potential barriers, outreach to these firms and clear communication about priorities and expectations to increase diversity. She noted that the issue goes beyond lack of access, however, and diversifying the talent pool is also key to diversifying the industry; she highlighted the importance of encouraging students to enroll in STEM programs to avoid this “pipeline problem.”
Rep. Patrick McHenry (R-N.C.), Ranking Member, House Financial Services Committee
In his statement, McHenry said that although everyone deserves an equal playing field, this has not been the case in practice, citing the same statistics as Wagner before him. He said it was important to identify the obstacles and strategies to address them, as well as foster a broader discussion on how to further diversity and inclusion in a comprehensive way.
Rep. Maxine Waters (D-Calif.), Chairwoman, House Financial Services Committee
In her statement, Waters said that it is time for members of Congress to “get serious” about diversity and inclusion and commit to doing the right thing. She said the Committee will “aggressively move forward” and be “persistent” on this issue.
Juan Martinez, Vice President/Chief Executive Officer and Treasurer, Knight Foundation
In his testimony, Martinez explained that the Knight Foundation assumed its investment program prioritized diversity, but found that only a fraction of its endowment was being managed by diverse-owned firms. He explained that the Knight Foundation became “intentional” in searching out opportunities to invest with diverse firms, and now 74 percent of the endowment is managed by 14 women- or minority-owned firms while still meeting return expectations. He explained that they conducted a “rigorous” study on diversity in the investment industry, which found that women- and minority-owned firms manage a small percentage of assets under management by U.S.-based firms, but there is no statistical difference in their investment performance. Martinez expressed hope that this research will spur others to join in similar efforts and continue the conversation.
John Rogers, Chairman, CEO & Chief Investment Officer, Ariel Investments
In his testimony, Rogers said that asset management is one of the largest sources of wealth, power and jobs in the U.S. economy, noting that the top three private equity firms control two million jobs. Rogers said that the four largest banks hire hundreds of asset management firms to invest nearly $1 trillion across three distinct pools of assets: their own corporate pension plans, their own 401(k) plans, and externally managed wealth management platforms, but that “you can essentially round down to zero” the assets managed by diverse firms across those pools. Rogers said that there is “no shortage” of diverse-owned firms, and the financial services industry is well-served by dynamic, diverse leaders who are job creators, philanthropists and role models in their communities. He explained that barriers include a tendency of people to work with people they already know, unconscious bias, and “well-intentioned” supplier diversity programs that focus on roles like construction and catering rather than professional services where wealth and power are created. He expressed support for the Rep. Beatty’s proposed legislation, the Diverse Asset Managers Act, which would establish a “Rooney rule” in asset management, and encourage greater transparency in spending by category to encourage broader supplier diversity.
Brenda Chia, Founding Board Member & Co-Chair, Association of Asian American Investment Managers (AAAIM)
In her testimony, Chia explained that the Asian American and Pacific Islander (AAPI) community faces specific challenges, most notably the “model minority stereotype,” in which AAPI are seen as successful and not in need of help in any field. She noted that studies have shown that minority- and women-owned firms invest in more diverse entrepreneurs and businesses, leading to greater impact in communities without sacrificing returns. She said that in order to level the playing field, minority managers must not be limited to “set-aside allocations” where they compete against each other for a small slice of the pie, but rather should compete for “the whole pie.” She said that Congress can create opportunity in this area, beginning with mandating that the trillions of dollars under federal management be open to periodic competition, and that qualified minority-led funds be part of any Request for Proposal (RFP) process. She expressed support for the Diverse Asset Managers Act, adding that by creating opportunity, Congress can take steps to ensure a more diverse pool of asset managers, open doors, and create greater transparency.
Angela Miller-May, Chief Investment Officer, Chicago Teachers’ Pension Fund
In her testimony, Miller-May explained that it is important to the 66,000 members of the Chicago Teachers’ Pension Fund that they hire asset managers, brokers and vendors that reflect the diversity of its members. She explained they set an “aspirational goal” that not less than 20 percent of investment advisors be minorities, women or persons with disabilities, and far exceeded this goal by investing 44 percent of their $4.6 billion in total assets with such firms. She said that investing with diverse asset managers that outperform and deliver strong returns is “more than prudent, it is wise,” calling it a “key source of diversification.” Miller-May said that many challenges remain, including investor and consultant bias, a perception of weaker performance, size and infrastructure, and industry trends, though the commitment of senior leadership and trustees has helped remove some of these barriers and allowed them to implement policies and track performance. She said that investors have the “greatest power” to effect change in the asset management industry, though Congress can “move the needle” and create opportunities at a “much larger scale.”
Meredith Jones, Investment Researcher and Author
In her testimony, Jones said that “every single person is poorer because we don’t have more diverse asset managers.” She explained that studies show the performance of diverse managers is comparable to or higher than a non-diverse cohort, adding that minorities and women with different cognitive and behavioral preferences leads to differentiated investment behavior. She said this can have “big impacts” for all investors, including providing liquidity when markets are down and differentiated returns in private equity. She said more diversity in the industry could mitigate market bubbles and bursts, as well as provide additional diversification within portfolios. She said education is essential in addressing the issue to ensure investors know they are missing out if they do not encourage diversity, ensuring asset managers understand the benefits of having diverse teams and the risks if they do not, and educating women and people of color at a young age to demonstrate that there are robust career opportunities available to them in this field.
Question & Answer
Rep. Alma Adams (D-N.C.) asked about the notion that diverse asset managers “perform poorly.” Martinez said this is “certainly false.”
Reps. Lacy Clay (D-Mo.), Anthony Gonzalez (R-Ohio), Adams and Beatty asked about bias among consultants. Martinez explained that there is a “power to incumbency,” as consultants favor the firms they know well and have longstanding relationships with, saying it is important for customers to express the importance of diversity to their consultants. Chia agreed and added there is a personal risk for consultants to make decisions with an unknown manager and it is safer to recommend a known manager. Rogers said that some consultants are very open to working with diverse firms, but others are resistant, noting that the customer must demand the consultant live up to their values. He added, however, that “outstanding performance” can overcome bias. Jones said it is important to present information in a clear and quick manner to institutional investors and consultants, and that they need to be exposed to more diverse managers to break down barriers.
Beatty asked the panelists if they would support a “Rooney rule” for asset managers, such as her proposed legislation, the Diverse Asset Managers Act. All panelists replied that they would.
Reps. Adams and Wagner asked about the best ways to remove obstacles and increase access to opportunities for diverse asset managers. Jones said educating investors and asset managers about the importance of diversity, as well as creating a pipeline of girls and people of color at a young age, are essential. She emphasized encouraging firms to disclose their diversity data, saying it is important for consumers to make informed decisions and for firms to track their progress. Miller-May said that diverse asset managers need to build relationships before an investor is searching for a manager, so the investor knows who they are working with and understands their track record.
Rep. Al Lawson (D-Fla.) asked about firms unable to meet minimum thresholds to work with institutional investors and how the playing field can be leveled. Martinez said that from the customer perspective, asset allocators should examine how they set their size guidelines and whether they can write smaller checks to broaden who qualifies. Chia added that organizations like hers are built to ensure institutional investors can meet and engage with diverse asset managers. Miller-May explained that their RFPs are often written specifically to seek out diverse managers, and they will lower their assets under management thresholds or alter other criteria to ensure diverse finalists are considered.
Reps. Madeleine Dean (D-Pa.), Gonzalez, Clay and Wagner asked about education and how to encourage more young people to pursue careers in financial services. Jones said encouraging young girls and people of color to pursue STEM has to start earlier, as children start opting out as early as age eleven. Rogers said it is important for young people to see people of color in leadership roles. Martinez agreed, saying that if a young person does not see someone they can identify with in those spaces, it becomes an “impenetrable barrier.”
Adams asked if companies should be required to share their diversity data, including their use of diverse asset managers. All panelists replied that they should.
Supplier Diversity Programs
Dean asked if “well-intentioned” supplier diversity programs are resulting in a “skewed picture.” Rogers replied that ideas about supplier diversity are “40 years out of date,” and do not consider diversity in professional roles such as lawyers, asset managers or accountants.
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