Would Adoption of Policies Like the Rooney Rule by Asset Allocators Encourage Greater Diversity Among Investment Managers?
No. Adoption of policies like the Rooney Rule—a requirement to interview at least one woman or person of color candidate for leadership positions by many companies and institutions—has not substantially improved diversity among leadership ranks. Given this reality, we doubt such policies would encourage greater diversity among investment managers. 1 These policies are not created to give hiring preference to diverse candidates but to ensure a diverse pool, which increases the chances of diverse representation, however they can also present risks. One such risk is that diverse candidates lose faith in the selection process if they believe they are invited to interview only to meet an internal goal. Instead, we favor a comprehensive approach that addresses inequities throughout the manager selection process.
In the asset management industry, some well-intentioned US institutional investors have adopted their own version of the Rooney Rule, requiring them to interview at least one asset management firm majority-owned by women or people of color when considering managers for their investment portfolios. The thinking is that given diverse managers demonstrate comparable performance to their white male counterparts, 2 they will be hired if they are included in searches. However, this outcome is not true if the selection process itself is unconsciously biased.
For success in creating portfolios managed by a diverse group of managers, inclusive practices should be incorporated at three different levels.
1. Build a Diverse Selection Team. Relationships and networks are influential in the manager selection process. Studies have shown that human beings gravitate toward homogenous networks, so it is fundamental that allocators be intentional about creating diverse teams. A diverse team will have a broader network for sourcing and referencing managers and a better lens to evaluate opportunities.
2. Cultivate a Representative Universe. Diverse fund managers make up 8.6% of the industry and less than 2% of assets, demonstrating that these managers are underrepresented versus the general population 3 and underfunded versus their representation in the industry. To build a portfolio that is at least representative of the available investment universe, asset owners must do more than add a single diverse manager option. Multiple independent studies 4 highlighted the ineffectiveness of adding a single diverse candidate to selection processes, as there can be a perception of tokenism and inferiority for diverse candidates. Furthermore, diverse manager representation should ideally be on par with their representation in the broader population so that women and people of color are normalized as candidates.
3. Correct Implicit Biases. While a challenging task, asset owners must deconstruct and reflect carefully on their own investment selection processes to correct for implicit biases. As an example, investors can:
- Reconsider use of referrals for manager sourcing;
- Reframe traditional evaluations of pedigree by focusing on roles, responsibilities, and experience rather than names of school or companies to assess backgrounds;
- Embrace alternative methods to assess a manager’s investment performance outside of a full market cycle track record; and
- Measure alignment as a percent of liquid net worth rather than percent of fund size.
If the root of the problem—unconscious bias in the decision-making process—is not addressed, we run two risks that constrain positive change toward a more diverse asset management industry. In the short term, we risk wasting time and failing to build strong relationships with diverse managers. In the long term, the continued lack of opportunity could lead to even higher barriers of entry for underrepresented fund managers. Rules without commitment can easily be satisfied, so institutions committed to equitable investing must do the uncomfortable work to seek change that goes beyond box checking.
Jasmine Richards, Head of Diverse Manager Research
Carolina Gomez, Associate Investment Director, Diverse Manager Research
- Cambridge Associates defines diverse managers as firms owned and/or led by women and people of color.
- Professor Josh Lerner, Harvard Business School and Bella Research Group, Knight Diversity of Asset Managers Research Series: Industry, December 2021. Diversifying Investments: A Study of Ownership Diversity and Performance in the Asset Management Industry, Executive Report, January 2019.
- According to the US Census Bureau 2020 Demographic Analysis, people of color make up nearly 40% of the US population. Women and people of color together make up more than 70% of US population.
- In 2016, a University of Colorado team conducted three separate hiring studies showing that in a finalist pool with one woman or person of color candidate, there is effectively zero chance of the person getting hired. A 2008 study of women on boards by Organizational Dynamics showed that adding one woman to a board was also ineffective and the benefits of a diverse team were not realized until reaching levels of normalization, which in this case was the presence of three women.