Diversification can generate better returns

Article

On February 12, 2020, Knight Foundation released findings from a study that analyzed the diversity among asset managers for the nation’s top charitable foundations. Silicon Valley Community Foundation’s Bert Feuss shares insights below. View the full report here, and see the press release here.

Bert Feuss

Eight years ago, Silicon Valley Community Foundation began examining the diversity of our staff, grantees, board members and our community, prompting us to also look closely at our investment portfolio. We discovered that it clearly lacked diversity. 

We believe that diversification of an investment portfolio across different strategies, geographies, points of view and ideas generates better and differentiated returns. To achieve that, we must first begin with diversifying our investment managers by seeking individuals who understand different parts of the world, different sectors and different geographies — not just hiring Caucasion males who mostly attended the same private schools and worked for large private wealth management firms.

Because we are committed to diversity — both as a culture value and as a fiduciary duty — we along with Colonial Consulting, our investments consultant, began working to identify and overcome barriers to securing talented minority and women-owned investment companies. 

The first step we took was auditing the manager research and selection process. We asked Colonial Consulting to report how many managers they met with annually, how many of those firms were women or minority-owned, and how many of those diverse managers were recommended and subsequently hired. We understood that in order to ensure we were meeting our diversity goals, it would take time to integrate these new practices into daily routines. For example, Colonial Consulting had to modify their databases to capture and store this new information. This created additional work for both teams, which was an adjustment for everyone. 

In 2015, Colonial Consulting hired a dedicated head of manager equity, Angela Matheny. At the time, Colonial Consulting had been meeting with an average of only 50 diverse managers. Because of Matheny’s outreach efforts, the number of meetings with women or minority-owned firms shot up dramatically; in 2018, Colonial Consulting met with more than 515 managers, 202 of which were diverse.

Our efforts proved to be worthwhile and the results have been promising. Fifteen out of the 19 diverse managers deployed across Colonial Consulting’s client base have exceeded their respective performance benchmark. The remaining four underperformed the benchmark by less than 1%. Those at the top of the list wildly outperformed the benchmark by hundreds of basis points. 

Today, we continue to focus on the diversity of firms and their owners. When we meet with firms, we ask them about their diversity and inclusion efforts, and how they share profits across the team. We want to see aligned incentives and inclusive participation.

These managers are often newer and in the process of building their businesses – and deeply focused on driving performance. They are grateful for the opportunity and feel tremendous commitment to do well by their clients. It is a win for both parties. 

Bert Feuss is senior vice president, investments of the Silicon Valley Community Foundation.


Photo (top) by Scott Webb on Unsplash. Image effects added by Knight Foundation.