The recent report released by Knight Foundation showed that diverse-owned firms manage only 1.4% of the total asset under management in the U.S. Josh Lerner, a co-author of the report and a professor of investment banking at Harvard Business School, said it underscores that, even with the best intentions, promoting diversity in the asset management industry is not an easy or overnight process.
The study analyzed capital allocation to and the percentage of AUM managed by minority-owned hedge funds, mutual funds, private equity and real estate firms. The findings revealed that mutual funds have the lowest representation of capital invested. Minority-owned firms manage only 0.4% of AUM and women-owned firms only 0.6%. Minority-owned and women-owned firms had the highest percentage in private equity at 4.5% and 1.6%, respectively.
Though mutual funds have the lowest AUM share, they have the second-highest percentage of diverse-owned firms at 9.2%, just behind hedge funds with 9.3%. It indicates that the amount of capital managed by diverse-owned firms is not proportional to the number of diverse-owned firms. According to the authors, the reason for this is that minority-owned firms are much smaller than their non-diverse-owned peers.
Real estate lagged all other asset classes in the percentage of minority-owned firms at 1.8% and women-owned firms at 2.8%. On the other hand, private equity led all others when it comes to the percentage of women-owned firms at 7.2%.
The study found no significant statistical differences in the performance of diverse- and non-diverse-owned firms across asset classes. According to Juan Martinez of Knight Foundation, it is because capital allocation has to do more with incumbency and size than performance. Asset owners usually find it more convenient to allocate capital to firms where they have an established relationship.
Martinez also said that the dearth of diversity data at asset management firms poses a challenge for institutional investors hoping to invest in diverse-owned firms. The report “Diversity and Inclusion: Holding America’s Largest Investment Firms Accountable,” released by Congresswomen Joyce Beatty and Maxine Waters confirmed Martinez’s claim. The report revealed that only nine of the country’s 28 largest asset managers provided data on the women- and minority-owned asset managers they were working with.