Should Clients Consider Diversity When Making Investment Decisions?
Yes, investors should consider diversity in the investment decision-making process, as we expect a diversity of thought and talent will lead to better investment outcomes than a process that ignores this important issue.
Diversity is not just about gender or ethnicity—it is about having different perspectives, different points of reference, and different experiences. Homogeneous investment teams are more susceptible to groupthink, missing out on unknown opportunities, and being blind to some risks. We expect that investment teams that consider diversity as part of their process have a greater opportunity for higher investment returns. Also, we believe that fund managers from underrepresented backgrounds will see opportunities and risks that others do not.
Not only is diversity a compelling investment angle in theory, but also hard data exists that support this view. For instance, the Knight Foundation’s Diverse Asset Management Firm Assessment study found that across all asset classes, diverse managers performed in line with their majority-owned peers. Additionally, for some asset classes, diverse funds are over represented among funds achieving top-quartile returns. Similarly, a National Association of Investment Companies study found that diverse private equity firms outperformed the median performer in 11 of the 14 years studied.
While the connection between diversity and investment performance is a budding focus of research, many studies show companies that are more diverse have higher levels of profitability and lower debt levels. A recent McKinsey report points out that gender diverse executive teams were 25% more likely to experience above-average profitability than less gender diverse peer companies. Moreover, ethnic and culturally diverse teams were 36% more likely to experience above-average profitability compared to less diverse peer companies. In the Credit Suisse seminal gender diversity report scanning 3,000 companies across 56 countries, researchers found that sales growth, earnings per share growth, and return on assets were all higher than for the broad universe of companies, and that debt/equity levels were lower.
In addition, a study by Great Place to Work found that publicly traded companies with highly inclusive workplaces thrived before, during, and after the Great Recession, gaining on average a stock return four times that of the S&P 500 Index. The study concludes, “More diverse and inclusive firms, institutions, and organizations are more resilient, better able to innovate, and keep employee morale and engagement high during times of distress.” When talent feels included, retention stays high and productivity increases—all adding to higher profits and lower costs. Diversity boosts the quality of decision making and encourages people to be more creative and diligent. It fosters enhanced innovation, expands perspectives and insights, and provides a competitive advantage.
Furthermore, diverse firms attract a broader universe of talent. According to a recent Glassdoor survey, 76% of all employees and job seekers said that a company’s commitment to diversity and inclusion is important when choosing an employer. The CFA Institute writes, “The successful investment firm of the future will be differentiated by its culture and its ability to attract the best talent. An inclusive culture that leverages diverse views effectively will be an important element determining a firm’s success.”
The importance of diversity is growing in the minds of investors. A 2020 survey of Cambridge Associates’ clients showed that 35% of respondents engaged in sustainable and impact investing consider racial and/or gender equity in investment decisions. While this is still relatively low, it is 10 percentage points higher than the same survey conducted just two years ago.
As the data show, diverse approaches can lead to greater investment returns and better talent development. We call upon all investors to intentionally integrate a diversity lens into their investment process.
Deborah Christie, Investment Managing Director on Cambridge Associates’ Global Investment Research Team