The Knight Foundation’s third edition of its Diversity in Asset Management Research Report once again showed a dramatic under-representation of minority and female-owned businesses in asset management, but with a slight improvement that promises to continue to grow.
Written by Professor Josh Lerner of Harvard University’s Business School and Rahat Dewan of Bella Private Markets, the John S. and James L. Knight Foundation commissioned its third study – the others were published in 2017 and 2019 – to analyze diversity between owning and managing assets in mutual funds, hedge funds, private equity and real estate on a sample of 10,008 US-based companies with a total of 31,763 funds and 82.24 trillions of dollars in assets under management (AUM).
The study found that the undiversified owners (white males) of all of these asset classes hold 98.6% of the assets, compared to 1.4% who are demographically diverse. Within that 1.4%, 0.04% of owners and managers across the industry own hedge funds, 0.99% own or manage mutual funds, 0.37% own or manage capital private and 0.04% own or manage real estate.
“It’s disappointing, but not unexpected,” said Juan J. Martinez, vice president and chief financial officer and treasurer of the Knight Foundation. “We have seen anecdotally that the opportunities within the industry for companies belonging to diverse groups are low and this reflects that. There are a lot of factors, especially around issues of ownership, size and opportunity that we believe have led to this type of concentration of assets in undiversified companies.
The Knight Foundation has invested $ 931 million in companies belonging to various groups, representing 37% of its endowment as of December 31, 2020. These companies include Ariel Investments, Brown Capital, Pugh Capital and LM Capital, according to a press release.
Last year, the foundation awarded 381 grants and distributed $ 123,809,334 “to create informed and engaged communities towards the goal of a more effective American democracy.”
“We are investors,” said Martinez, “and to us the right, successful investment of these assets means a lot. But we are also an organization that cares about our community, that lives in our community and that serves our communities.
In 2010, he said, Knight Foundation CEO Alberto Ibargüen was asked at a conference about the level of diversity within the foundation’s endowment. “And what we found out was that the endowment at the time had a $ 7.5 million commitment to an African American-owned business. And that was it. And we thought it couldn’t be.
“So we immediately looked at our own internal processes on the investment side and tried to understand what we were doing that we could change,” he said. “In that time, we’ve gone from a very small amount of money to about $ 1 billion, and about a third of our portfolio is managed by companies from various groups.
Data from the US Census Bureau for the 2020 Census showed that the black American population increased by 5.6%, the Asian American population increased by 35%, and the Hispanic population increased by 23%, while the white American population has shrunk by about 9%. Diversified holdings that manage just 1.4% of assets, Martinez said, are a problem.
“The field of investment management… generates incredible wealth for its asset managers, and in the capital decisions it makes, it supports and provides opportunities for the entire economy,” he said. -he explains. “So if the asset managers, those who allocate and make the investment decisions, are not representatives of the whole community, you can say that there are investment opportunities that are not. identified and that there are opportunities for growth within communities that do not receive sufficient capital allocations.
Research has also shown that the percentage of assets under management owned by various owners increased from 1.0% to 1.4% between 2016 and September 2021. Although it has improved slightly, it is doing so at a rate very slow, according to the report.
In addition, there is a strong under-representation of capital controlled by minority groups. The study suggested that “although there may be a relatively large number of minority-owned businesses, the size of the businesses is much smaller than that of their peers belonging to undiversified groups.” For example, the highest percentage within each asset class owned by minority-owned companies is in hedge funds and mutual funds, at 9.3% and 9.2% respectively, but 9 , 2% of companies belonging to various groups that manage mutual funds hold only 0.4% of the sector’s assets. funds.
The highest representation for women-owned businesses is among private equity funds and mutual funds at 7.2% and 6.7% respectively. But again, they only manage 1.6% and 0.6% of industry funds.
“You can see that this has significant consequences,” Mr. Martinez said. “Real estate funds, for example, which are very capital intensive, are the area where you have the least representation or diversity. This is an indicator that it is more difficult for funds belonging to various owners to obtain large allocations of capital and it almost becomes like a self-fulfilling prophecy in which, because they are smaller compared to their peers, many large asset distributors will not allocate capital to them. “
The average fund size, regardless of asset class, is considerably larger – in most cases double – for companies with undiversified holdings. For example, undiversified businesses manage $ 4,761 million across all asset classes, compared to $ 2,194 million managed by women-owned businesses and $ 911 million managed by other-owned businesses. minorities, according to the report.
As an asset allocator, like the Knight Foundation, Martinez said businesses and organizations need to understand the criteria to make an investment. “In the case of these small businesses that are in various groups,” he said, “you can build a relationship early on and then get some access to that business so that over time. as they continue to grow, you keep making allowances to them and increasing your allowances.
While representation still lags across all asset classes, diverse representation in terms of assets under management has increased, especially for private equity and hedge funds, according to the study. Likewise, it is increasing at a faster rate than non-diversified companies.
“Minority-owned funds in particular have grown rapidly,” the report said, “with a compound annual growth rate (CAGR) of 27.4% in private equity and 6.6% in private equity. hedge funds, far outpacing growth in non-diversified assets under management. . “
In real estate, the AUM of women-owned companies grew faster than their undiversified peers, with a CAGR of 26.7%, compared to 16.1% of the CAGR of undiversified companies.
Research has also shown that private equity assets managed by minority companies were just over 2% in 2011 and in 2021 at 4.5%. Hedge fund holdings of minority-owned companies was around 1.8% in 2011 and now stands at 3.4%. In the case of women-owned companies in hedge funds, they made up 1% of the industry in 2011 and they now manage 2.2%.
“Diverse businesses, whether it’s women or a diverse demographic,” Martinez said, “work at least at an equal level, statistically, as undiversified business owners. We find no statistical evidence to support the idea that there is any performance concession to diversity. “
The hope of this research, he said, is that as more data becomes available and asset managers provide more information in terms of the diversity of companies and the diversity of its recipients. allowances, it becomes easier for others to study this field.
“There are signs of hope,” Martinez said. “We recently published another study on foundations, their investments and the diversity of their portfolios. We found that about 16% of their US-based assets on average were invested in companies belonging to various groups. “
This report, along with the full Diversity Assets Under Management research report, can be found on the Knight Foundation website under the Research tab.
“These very professionally managed portfolios aim for greater diversity,” said Martinez. “We believe this is an indicator of a trend that may emerge.”