February 21, 2019
2018 Diverse Asset Management Study
Few people would be shocked to learn that the asset management industry remains a [white] boys’ club. But we have the evidence. Our 2018 Diverse Asset Management Firm Assessment (and update to our 2017 diversity study) funded by the Knight Foundation, shows that the industry is characterized by strikingly low levels of diversity. In our project, we set out to determine the number and size of diverse-owned asset managers across four groups - mutual funds, hedge funds, private equity (PE), and real estate (RE). Overall, diverse-owned managers control just 1.3% of all US-based managers’ assets. One possibility is that diverse-owned managers may earn lower returns than their peers - causing investors to avoid such funds. The data tell a different story. We find no evidence of consistent performance gaps between diverse-owned and non-diverse-owned funds. We conclude that new explanations may be needed to understand the lack of diversity.
To investigate diverse representation in the industry, our team compiled diversity information on active asset managers. Three commercial databases - Hedge Fund Research (hedge funds), eVestment (mutual funds), and Preqin (PE and RE) - allow us to collect self-reported diversity data for US-based managers. Data providers typically define a diverse-owned firm as one in which women or minorities own either 25% or 50% of the firms’ equity. As noted above, our data show only 1.3% of industry AUM controlled by diverse-owned asset management firms, when using a 25% equity threshold. Moreover, this level is nearly unchanged compared to our 2017 estimate of 1.1% - indicating that any changes in diverse ownership have been extremely limited.
While the aggregate level of diversity is telling, this lack of diversity appears widespread, rather than confined to one asset class. The chart below depicts the percentage of total asset class AUM managed by diverse-owned managers. Because PE and RE databases define diverse-ownership using a 50%, rather than a 25%, equity cutoff, here we make comparisons using a 50% threshold. Across all categories examined, diverse representation, as measured by AUM is lowest for mutual funds - with women - and minority-owned firms controlling 0.4% and 0.3% of total mutual fund AUM. Although PE appears to be diverse relative to other asset classes, its diversity levels are clearly low in absolute terms - women - and minority-owned firms manage just 3.4% and 3.8% of total private equity AUM.
Note: The chart above measures women - and minority-ownership using a 50% equity threshold.
In addition, we also document low levels of diverse ownership when measuring diverse firms as a percentage of all firms in each asset class. We next display, by asset class, the percentage of total firms with at least 50% of the equity held by women or minorities. Although the firm shares are higher when compared to the previous chart, our estimates range from 1.8% for women-owned real estate firms and up to only 8.3%, for minority-owned hedge funds. To put these images into perspective, 2017 Census Bureau estimates show that 23.4% of the US population are non-white. As you might expect, around half of the population (50.8%) are female. Taken together, the data reveal that low diversity levels are common to all four asset classes.
Note: The chart above measures women - and minority-ownership using a 50% equity threshold.
A potential reason for the lack of diverse owner firms is that such managers may underperform relative to their non-diverse peers. Consequently, investors may shy away from committing capital to diverse-owned funds to avoid lower returns. In our 2017 diversity study, our Performance Analysis looked at differences in returns among women-owned, minority-owned, and non-diverse-owned funds while controlling for, or “holding constant,” other characteristics likely to affect returns. We found no statistically meaningful differences in performance among diverse and non-diverse funds.
In our 2018 study, we conduct an Enhanced Performance Analysis (see full report) that examines possible underperformance in a more robust way. We enhanced our previous analysis with better measures of risk (for hedge funds and mutual funds) and return (for PE). For hedge funds and mutual funds, we use the strength of the relationship between a fund’s return and public market factors to better control for risk. In the case of PE, we use the highly respected approach of benchmarking fund returns against the public markets.
As in our 2017 study, we find no support for the claim that diverse funds underperform. In fact, there is limited evidence that some diverse funds outperform relative to their peers. Our analysis suggests that new explanations are needed to fully understand the lack of diversity in asset management.
While our study provides an important update to our 2017 diversity report, the Bella team continues to research new explanations for the lack of diversity in asset management.
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