Two heads are better than one. But what if those two heads have the same outlook, look for the same things, and think the same way? These two heads might not bring the advantage that you might have hoped for. In this Q&A, Jasmine Richards, Senior Investment Director & Head of Diversity Manager Research at Cambridge Associates, shows us how diverse demographics, experiences, and thinking can contribute to the bottom line, and how to put it all into practice.
How does diversity, whether in terms of people, experiences or geography, help drive investment performance?
When I am performing underwriting on a manager, I like to ask about their investment biases and how they have structured their team to mitigate those biases. Each person’s biases are a result of their life experiences and inform the lens through which they view the world. I believe this absolutely influences how investors manage a portfolio. I also believe it drives performance, in two ways. First, an individual with a unique viewpoint might find value where perhaps another person might not, expanding the opportunity set for a given strategy. Whether for a public or private investment strategy, this is highly valuable. Second, having a team that is sufficiently diverse, where one individual’s biases can offset those of another, helps mitigate risk. As an investor, a diverse manager gives me increased confidence because of their ability to catch potential risks that perhaps a team with a more homogenous world view, might not.
How do diverse managers compare today with traditional firms in terms of AUM and in attracting investment dollars?
In 2017, Cambridge Associates collaborated with the Knight Foundation and Harvard Business School on a study which was updated this year as well. The paper took a detailed look at diverse asset managers and their performance, as well as the assets allocated to them. What we found was a severe underrepresentation, with just 1.3% of industry assets under management invested with diverse managers, defined as women- or minority-owned. Not only are these managers underrepresented in terms of number, far fewer dollars are being allocated to them, with diverse managers receiving roughly one tenth the assets of their non-diverse peers. As a result, diverse managers overall are smaller, and also newer, while operating in a market where there's historically been an appetite to invest with their larger peers. Overall, investing with a diverse manager means dealing with some of the organizational issues inherent in a smaller firm. That said, all such issues can absolutely be researched and managed.
Overall, how have diverse investment managers compared with male or non-minority owned managers in terms of performance?
We have found there is absolutely no statistical difference in performance. In fact, among top quartile managers, there's actually an overrepresentation of diverse managers, with 39% of diverse managers falling in the top quartile of performance, vs. 25% for non-diverse managers. And so it’s particularly interesting to note that you actually have a better chance of outperforming the benchmark by investing with diverse managers. For Cambridge Associates, given the underinvestment I mentioned, this offers a massive opportunity to bring high-quality, differentiated portfolios to our clients.
When it comes to identifying and evaluating women and minority-owned investment firms, is there anything unique in terms of how you vet or research such managers?
In conducting due diligence, given the historical legacy of the asset management industry, you need to understand that diverse managers may come in a different package than the more traditional, longstanding, and often larger organizations. This means you might not be able to apply the same pattern matching that we as allocators are used to using for example only considering strategies that have a 10-year track record or only considering firms over a certain AUM would be severely limiting. It's our view however, that all of these factors are all capable of being researched. Of course, there are some diverse managers who have longstanding histories and performance track records at larger firms. That said, on the whole I think you need to be open to considering managers with unique backgrounds but who still offer the required skillsets. If you do, you have a real opportunity for a greater diversification of viewpoints and investments, and better results, within your portfolio.
Are there any particular avenues or methods you have found to be more fruitful when conducting due diligence on a minority-owned or woman-owned firm? Or does it not vary?
I think the key is changing the networks through which you are sourcing managers, and I believe there is some element of relationship that informs that process. You have to be willing to explore new areas, whether that is attending different types of conferences, using different references, or considering entrepreneurs rather than the industry veterans who have historically managed portfolios. With a more expansive view, you can possibly uncover some true gems.
One year into your newly created position at Cambridge Associates, what have you seen in terms of client interest in socially responsible investing, particularly investing with diverse-owned asset managers?
When I began at Cambridge Associates, I absolutely hit the ground running and we have continued to see a significant pick up in interest among our clients. This growing awareness was part of the rationale for having a dedicated person at Cambridge Associates focused specifically on this area. What has been the most encouraging, quite honestly, is to see the interest is not just among our impact-based clients. Across the board, clients want to understand the level of diversity in their portfolios and in many cases are seeking to increase that diversity. This fits squarely with my efforts to expand the representation of diverse managers in our portfolio, and not only for those who are seeking such managers. For example, when I look at a growth equity strategy offered by a diverse manager, I will evaluate that strategy solely on its merits versus our entire stable of managers. If I approve the strategy, we will incorporate it into the portfolio of an investor, regardless of whether or not that investor has actively sought diverse managers.
Where do you think Cambridge Associates and the industry will be 12 months from now?
Twelve months from now, I hope to see an increased tool kit available to asset owners who seek to invest with diverse managers. At Cambridge Associates, we will continue to push forward with our diverse manager underwriting and data gathering. In fact, we have a number of diversity-related initiatives underway this year including issuing a comprehensive survey to managers on our platform. Additionally, we will continue to work closely with clients, some of whom are in the beginning phases of exploring ways to be more intentional about the types of managers with whom they invest. Our goal is to not only increase the number of diverse managers on our platform, but to also increase the assets deployed with those managers.
Under the spotlight: Jasmine Richards
As Senior Investment Director and Head of Diversity Manager Research at Cambridge Associates, Jasmine leads the firm’s identification and research of institutional-quality investment managers across public and private asset classes that have diverse owners or leaders, including women and people of color. Jasmine joined the firm in 2018 and has more than 15 years of investment experience, both on the buy and sell sides.