(c) 2019 MJ Alts
I have to say, Facebook is getting disturbingly good at targeting ads. Lately my timeline has been populated by comfort items – cozy PJs, custom pillows that ‘guarantee’ a good night’s sleep, shoes without three-inch heels and even this random beanbag thing called a MoonPod. Evidently you buy one too many cards that reads “People, Amirite?” and the magic algorithms of Zuckerberg’s evil empire decide you need a little time out.
In this case, however, they happen to be right. I am tired. Exhausted. Plum tuckered, to use the language of my youth. Lately, I DO actually find myself in need of a mysterious bean bag chair that simulates weightlessness and helps to reduce anxiety and depression. And why I find myself in this state (and why I actually bought that effing MoonPod) is no real mystery. It’s people. Specifically, it is people in the investing industry.
You see, over the past several weeks, a couple of articles have been published that purport to explain why diversity does (or doesn’t) matter in the investing world. The first (in Barron’s) included comments from Jane Buchan that were based on a 2016 study by Rajesh Aggarwal and Nicole Boyson which found “funds with all female managers perform no differently than all male‐managed funds and have similar risk profiles” The second, which was cited in multiple outlets, including in the Financial Times with the incendiary title “Harvard Study Questions Benefits of Fund Manager Diversity,” was penned by Josh Lerner of, you guessed it, Harvard.
As someone who is active in the emerging and diverse fund manager universe, let’s just say the appearance of these articles means I’ve gotten A LOT of emails and DMs on the topic over the past few weeks. I’ve received enough, in fact, to turn my thoughts from acquisition of the Iron Throne to procurement of a freakin’ anti-gravity bean bag.
First, let’s set aside any issues I may have with the way various diverse manager studies are conducted. No study is perfect, including the ones I’ve done myself. However, there are some specific items that really butter my toast:
Single source data – Particularly in the alternative space, using a single data source is almost a guarantee for a small sample. Looking at the total manager counts in some studies is almost enough to make me buy a pair of comfortable shoes, especially since in a number of cases I can list more diverse funds off the top of my head than were included in the total sample.
Mixing social justice and behavioral finance – I get why studies use women- and minority-owned firms as a data set in performance papers, I just don’t happen to agree with it. One metric attempts to measure social justice (the existence or lack thereof of a level-playing field in fund management), while the other aims to quantify behavioral finance – how different subsets of people prosecute investing opportunities and whether these approaches are more or less successful. IMHO, in order to have a true picture of performance, you need to look at the full sample - all diverse fund managers regardless of their stake in the firm’s bottom line. You can still measure the existence of diverse fund ownership, just don’t conflate the two issues.
Focusing on fund performance – In the long-only space, for example, you may find a number of diverse investment managers who don’t have a mutual fund or CIT or other vehicle due to the costs involved and need for a seed investor. But isn’t their performance meaningful as well? Same goes in PE, where a number of diverse private equity investors work (at least initially) more in co-investing than in traditional comingled funds for the same reason. I know it makes it tougher to collect data, but ultimately the data would be more robust.
Looking only at averages – Many studies have found, including Lerner’s recent study, that even if averages are equal, that there may be a disproportionate percentage of diverse funds in the top performance quartiles. Seems like this is an important point, too.
But, leaving all that aside, what makes me most want to retreat to the MoonPod are the emails I get that say, “Huh, I guess diverse fund management ISN’T a thing.”
It’s funny (and I don’t mean HaHa) that I tend to get two responses to these studies when they come out. If a study shows outperformance for diverse fund managers, the default response is “Jackie Robinson.” I can’t tell you the number of times that someone says to me “Don’t you think that the real reason diverse managers outperform is because the fund management industry is so unwelcoming to women and minorities that only the best and brightest diverse managers survive, which is why they ultimately outperform?”
If, on the other hand, a study like Lerner’s or Aggarwal’s shows that performance of diverse fund managers is roughly equal to that of white male investment counterparts, I get the “Ginger Rogers” defense. “You know, if there isn’t outperformance in the diverse manager landscape…if the diverse fund manager can’t do all the same moves backwards and in heels…what’s the point?”
Robinson on the left of me. Rogers on the right. Here I am, stuck in the middle with you.
So it’s either the studies are skewed towards high performers, with the accompanying implication that when more, potentially less skilled, diverse fund managers enter the fray that said outperformance will be as ephemeral as my desire to wear flats. Or the studies show no significant outperformance, meaning that there is no reason to take a “risk” on someone whose personal appearance, background or fund management organization may look different.
But y’all. We are in the investing industry. We take risks every day. We are supposed to look at the available data and make a calculated calculation about whether or not a particular investment is “worth it.” But somehow we continue to miss the forest for the trees on this particular topic.
The lion’s share of the studies (NAIC, CityWire, Lerner, Aggarwal, BarCap, Babalos, Morningstar ,Rothstein Kass to name a few) that are available show that diverse fund manager performance (either within separate funds or in mixed gender teams) is equal to or greater than the total investment fund universe, effectively taking performance OFF the freakin’ table as a risk factor.
So, if performance isn’t a negative factor and, in fact, may potentially be a positive, what risks remain?
Mainly ones we are creating ourselves.
You see, in Aggarwal’s research, he found that funds with at least one female fund manager fail at a higher rate than all-male fund complexes. He notes that “management and incentive fees are much higher for all-male funds than all-female funds” and I can anecdotally say the same is true for minority-run funds. And both groups are almost always more willing to negotiate fees, too. When you combine this with the ample research that diverse funds tend to have fewer assets under management (AUM) than non-diverse funds (BarCap, Lerner, Aggarwal et al), and it is little wonder why these diverse managers don’t have the same robust operational infrastructure of their non-diverse, large fund brethren? A – they don’t need it at their size and B – they can’t afford it as they slash fees in an attempt to grow AUM.
Indeed, it seems like the market is looking for a perfect, shiny, definitive study that proves, beyond the shadow of a doubt, that diverse fund managers (along with two of my other fund management loves, emerging managers and ESG investing) consistently beat non-diverse funds in order to justify the “risk” of investing with them. A “risk” that would be mitigated if only more people were investing with them.
Calgon, take me away!
At the end of the day, I just don’t see studies saying diversity is a bad thing. I see studies saying it can be difficult to manage diversity. I see studies saying it can be uncomfortable for the team involved when differing opinions and viewpoints are brought into play. I see studies saying building diverse teams (or portfolios) can be tough. But diversity of thought and behavior is, I think, worth the impediments and small risks we take to get it.
I’d be willing to bet my MoonPod on it, y’all.
