Pervasive issues of systemic racism and imbalances of power in the United States are rightly center stage following the most recent killings of Black citizens by the police and the disparate rate of COVID-19 deaths in Black communities. Many colleges and universities are responding to this moment by working to understand the various ways racism and bias play out on their campuses and in their business operations.
As college leaders reflect on their institutions’ roles in perpetuating systemic racism and seek to identify how they can contribute to a more just nation, honest self-examination requires consideration of where college endowment funds are invested.
North American college endowments represent over $600 billion in assets, with more than half of those funds held by the 30 largest endowments. College investment offices do not have a mandate to publicly disclose information about the asset management firms they select to manage their endowment dollars. As a result, there is no comprehensive information reflecting college hiring of asset management firms owned by women and people of color.
The financial sector suffers from a severe lack of diversity. Current and historical industry practices limit the ability of Black, Indigenous and other people of color, as well as all women, to participate in and influence how capital is invested in our economy. In the $69 trillion asset-management industry, firms owned by women and people of color manage only 1.3 percent of those assets, despite research from the Knight Foundation, McKinsey & Co., and Morningstar demonstrating no evidence of difference in performance between diversely owned asset management firms and their white male-owned peers.
In a recent piece for Georgetown University’s Beeck Center, Erika Seth Davies observed that although “touted as a system built on meritocracy and market-driven performance, access to capital markets, like all other facets of American society, is influenced by the same policies, practices, and cultural representations that accumulate advantage and disadvantage along the lines of race.” Research out of Stanford University found that asset allocators struggle to accurately evaluate racially diverse teams, suggesting that they are missing out on high-performing talent.
While top-tier institutions have faced pressure from students to divest from fossil fuels, calls for transparency about the diversity of endowment fund managers have not been widespread. However, students are beginning to take notice. In response to letters from the Reverend Al Sharpton requesting diversity data from investment offices, The Daily Princetonian published a piece in May with the headline “PRINCO claims it prioritizes data. Experts want proof.” The Michigan Daily published an article in April highlighting Sharpton’s call to action. As students return to campus in the fall, they are likely to pay close attention to this issue and other ways their institutions are backing up recent messages of support for members of Black communities. Students aren’t alone -- Congress has also put college and university investment offices on notice.
Investing with an eye toward racial and gender equity calls for intentionality in additional decisions outside of selecting fund managers. However, in seeking out and investing with firms owned by women and people of color, endowment offices have an opportunity to better align their work with their institutions’ stated values, serve as models for the wider investment community and encourage growth of diversely owned firms.
In 2018, we at the NYU Stern Center for Business and Human Rights worked with the Diverse Asset Managers Initiative and Robert F. Kennedy Human Rights to convene representatives from 13 of the largest college and university endowments. Through this meeting and a series of follow-up conversations with investment offices, we have identified three recommendations for institutions seeking a starting point.
First, institutional leadership should prioritize diversity among their endowment’s fund managers, which requires engaging with the right partners and dedicating resources to address the problem. In 2010, University of Chicago president Robert Zimmer and chief investment officer Mark Schmid partnered with John Rogers, vice chair of the institution's Board of Trustees, and Nadia Quarles, who leads the university’s Office of Business Diversity. Together they developed and are now implementing strategies for hiring high-performing diverse-owned asset managers. Through increased networking opportunities and innovative screening practices, the university went from working with five diverse-owned asset management firms in 2010 to 25 diverse-owned firms now managing 15 percent of its overall portfolio.
A second recommendation is for colleges and universities to track and report on the percentage of their endowment managed by firms owned by women and people of color. The University of California released a 2019 report detailing its work with diverse fund managers, setting an example for other leading institutions to follow. Sharing this data across many investment offices will allow for the establishment of a benchmark and useful metrics to measure progress. And sharing this information publicly will increase accountability and is therefore likely to accelerate improvement.
Finally, cross-institution collaboration can help senior investment officers identify effective tactics for meeting their commitments to enhance diversity among fund managers. The conversations co-hosted by our center have provided one forum for sharing best practices. During a March 2020 call among four top university endowment offices, Harvard University described strategies for opening doors to a wider universe of asset management firms owned by women and people of color. Its methods can be applied across colleges and universities to counter common industry practices of relying on limited internal networks and request-for-proposals qualification requirements that exclude new talent.
Conversations with college and university investment officers have surfaced hurdles that must be cleared to improve diversity among their fund managers. The majority of those hurdles are the result of historical social policies and practices designed to limit access to capital and uphold existing power imbalances. Correcting for the underrepresentation of women and people of color in asset management therefore requires designing new practices and taking progressive action. Going forward, for higher education institutions to remain relevant, we will have to address diversity throughout our operations, including in our investments. Discussions about diversity can no longer stop at the investment office door.