Black Asset Managers and the Fight for Investment Capital
By Alan Hughes
Whether working in academia, a municipal, state or federal department or within Corporate America, Black employees contributing to their retirement plans have one thing in common: their retirement assets are managed almost entirely by people who look nothing like them. And this longstanding dynamic is draining wealth from Black communities.
The asset management industry, one of the remaining bastions of the old boy network, is not only frighteningly non-diverse at the upper levels, but those professionals of color within the industry find themselves struggling to raise capital from institutional pension plans – often in spite of equal or superior performance to their white competitors. The public and political pressures that led to workforce and supplier diversity programs have yet to impact the asset management industry materially.
However, the industry is being called to task by legislators, trade associations, national public policy firms and others looking to create diversity in an industry that for the most part, remains slightly more diverse than it was during the time of J.P. Morgan.
The non-profit John S. and James L. Knight Foundation found that firms owned by women and people of color managed just 1.4% of assets in the $82.24 trillion asset management industry as of September 2021. In fact, diverse-owned management firms’ collective assets under management (AUM) barely increased from where they stood in 2016 (1%) to the current 1.4% over five years – despite an increasingly diverse workforce contributing to retirement plans. Organizations like the National Association of Investment Companies (NAIC), National Association of Securities Professionals (NASP), Diverse Asset Managers Initiative and National Action Network are among those working to address this disparity.
And while it may be easy to paint asset management professionals – diverse or otherwise – with the same negative stereotypes applied to large Wall Street hedge funds and stock traders, the lack of color in the industry means fewer Black asset management firms of scale that are more likely to hire minority professionals and invest in minority-owned businesses.
That loss of wealth also impacts some of the most venerable and respected Black institutions. “The Studio Museum, the Apollo Theater and the DuSable Museum are increasingly supported by Black wealth, not the government and not white wealth,” says Robert Raben. Raben leads the Diverse Asset Managers Initiative, which works to increase capital allocations to minority-owned firms. “The more the system, the firms, the institutions that hire managers insist on keeping talented Black managers out of the pool, the harder it is to accumulate wealth.”
Asset management firms earn money by charging fees to manage financial assets for these institutional investors – organizations like banks, pension funds, labor unions and insurance companies that pool funds on behalf of others. The asset management firm develops a strategy to invest those funds in stocks, bonds, private equity, real estate, or other asset classes. While fee structures vary, the asset management firm often generates income by charging a fee based on a percentage (usually 2%) of the assets they’re managing for the institution with additional bonuses from realized gains.
The disparity in managed assets becomes even more egregious when considering the plethora of independent studies confirming diverse asset managers perform on par with – or better than – the mainly white male-dominated firms receiving the vast majority of the investment capital. One such report, “Examining the Returns 2021: The Financial Returns of Diverse Private Equity Firms,” is published biennially by the NAIC with assistance from global accounting and professional services firm KPMG. The report found that diverse-owned firms outperformed the industry benchmark in 83.3% of the periods measured.
And that performance isn’t just a one-off. “The data set that we use stretches back for almost a 30-year period, and over the life of that study, we have found that diverse managers tend to outperform the market in good times and bad,” says Robert L. Greene, president and CEO of the NAIC. With over 150 firms that collectively manage more than $260 billion in institutional assets, the NAIC is the trade association and largest network of diverse- and women-owned private equity firms and hedge funds.
While racial biases are a major contributor, it’s not the only factor. Many retirement programs simply are not structured to do business with diverse managers, who tend to be smaller players. The institutional investors (and the investment management consultants they hire to select asset managers) look to make large allocations that won’t represent the bulk of a firm’s assets under management – either by mandate or due to risk aversion. This means that pension plans that, on average, want to invest at least $100-$200 million at a clip, have fewer opportunities to do that with diverse managers than they do with the broader marketplace.
Then there’s the tendency by those controlling the purse strings to go with the brand-name, recognizable global firms – even though it may mean sacrificing performance. “I think one of the biggest challenges is people tend to invest in familiar funds,” says NAIC’s Greene. “No one is excited about the investment they’ve never heard of or the firm they’ve never heard of.”
Much-needed change in the industry could come in the form of legislation. Last month, U.S. Senator Tim Kaine (D-VA), Senator Cory Booker (D-NJ) and Congresswoman Joyce Beatty introduced the Too Narrow to Succeed Act. The proposed legislation would increase transparency in federally controlled trusts and retirement plans and identify barriers to the usage of diverse asset management firms among private-sector retirement plans. It would also disseminate best practices to expand diversity to improve access to diverse-owned asset management firms. This legislation would enable public- and private-sector retirement funds to increase opportunities for women and people of color operating asset management firms.
The National Action Network (NAN) is also applying pressure. A letter from Rev. Al Sharpton, NAN’s President & Founder, sent in 2020 to Lawrence Bacow, President of Harvard University, requested information as to whether any senior African American professionals were managing the university’s endowment. The letter also asked whether the management of the endowment is outsourced; whether any of the assets are directly managed by asset management firms owned or significantly controlled by African American asset managers. Similar letters were sent to leadership at Yale, Princeton, Cornell, Columbia, MIT, Stanford, University of Pennsylvania, University of Texas, and the University of Michigan – all of which have endowments totaling billions of dollars.
Trade associations are also playing a vital role in tackling the prevalent disparity. The National Association of Securities Professionals (NASP), a trade association and resource for minorities and women in the financial services industry., offers an annual Consultant Retreat to increase access to institutional investment consulting firms for its membership base. The NAIC sponsors an intensive nine-week symposium designed to help smaller asset managers understand what it takes to raise a fund and grow a firm to scale successfully. Greene estimates some 350 managers have trained through the program since introducing it three years ago.
Raben’s Diverse Asset Managers Initiative takes an educational approach to push decision-makers at these retirement plans to accept that they are missing out on talent and returns by not working with the full spectrum of the asset management industry. “You would think that that wouldn’t be hard, but given the tremendous bias in our nation, it’s actually a lot of work to get people to accept the fact that there’s enormous Black talent out there in real estate and in private equity, hedge, mutual funds and in bonds,” Raben says. “We don’t have a supply problem in 2022. We have a demand problem. So, the principal work is education and forcing institutions, universities, pension plans, high net worth individuals, corporate treasury, and foundations, to see what’s hiding in plain sight, which is Black talent.”
Individuals outside of the financial services industry can also help, according to Raben. “Let your elected officials know that you’re going to be vigilant about them investing with diverse managers,” he suggests. “Secondly, to the degree that you have connections to institutions within communities of color, be they churches or fraternities or sororities, tell them that there’s an expectation from the membership that they invest with people that look like them.”
Until parity is achieved, legislators and other organizations will continue to pressure decision-makers at these venerable institutions to practice transparency and meet their fiduciary obligations by looking beyond the usual suspects to manage retirement assets. According to NAIC’s Greene, “There needs to be broader acceptance within the supplier diversity community and the ESG community that investing with diverse managers is as important as buying office supplies from diverse suppliers.”
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