Using Our Investment Tools to Diversify the Investment Industry – Knight Foundation
Learning and Impact

Using Our Investment Tools to Diversify the Investment Industry

On September 30, 2021, Knight Foundation released findings from a study assessing the representation of investment firms owned by women or members of racial or ethnic minority groups in the United States among investment firms used by the country’s top 55 charitable foundations in terms of total asset size. View the full report here and see the press release here.

The Chicago Community Trust’s Laura Kernaghan shares insights below.

Laura Kernaghan

Working to diversify the asset management industry fits into a larger picture for The Chicago Community Trust and our efforts to advance equity, opportunity, and prosperity.  In a city and country where wealth disparities continue to grow, financial services is a lucrative career path, but also an industry that is notoriously homogeneous.  

Management of our $3 billion-plus investment portfolio provides an opportunity to address the gross disparities in an industry where, according to the John S. and James L. Knight Foundation, about 98 percent of assets are controlled and directed by white males.  

We began working to diversify our asset managers nearly a decade ago and while we have made significant progress toward our financial diversity goals, we have come to recognize that it is an ongoing journey. Overcoming years of exclusion and disparity in the investment world cannot be achieved simply by flipping a light switch; it is an evolutionary process requiring our constant involvement, attention, and refinement.   

Here are three lessons we have learned in our ongoing effort to use the financial tools at our disposal to bring the diversity we seek: 

  1. Forging partnerships for change.  Most charitable organizations do not negotiate the world of finance and investment on their own.  Instead, they employ investment consultants or other advisers to assist with implementing their investment strategy and selecting external investment managers.  We have invited these partners to join us in pursuing greater manager diversity.  By making progress in meeting diversity goals a priority for our entire investment team, we have realized significant gains over time. 
  1. Making diversity goals a part of the process.  Promoting diversity in the financial sector requires intentionality. To make progress, we needed to document our goals, regularly report on our progress, and work to build diversity into our decision-making. It also requires drilling down to look at specific populations. For example, we know that Black and Latinx asset managers are less represented than women in the industry. As a result, within our investment decision-making process we are now more intentional in prioritizing managers from these especially under-represented groups.   
  1. Advancing investment talent.  There are plenty of qualified firms, but they often struggle to win attention from “gatekeepers” such as consultants and advisers. By consistently emphasizing our expectation that diverse managers will be presented as candidates for inclusion in our investment portfolios, we have been able to discover new talent. As more and more organizations do the same, the incentives for consultants and advisors to identify diverse talent will build over time. Equally important is encouraging the hiring and promotion of diverse talent within non-diverse firms.  This is critical in “building the pipeline” of talented and experienced individuals who can assume positions of influence and leadership in the industry and, eventually, start firms of their own.

Increasing diversity in investment managers does not mean sacrificing investment returns. Today, between 25 and 30 percent of our primary pooled investment portfolios are invested with diverse managers, and we continue to achieve our investment return objectives.  Indeed, increased diversity has provided our team with a broader array of talent and a wider range of viewpoints.  Often, diverse managers can identify investment opportunities that more traditional managers might overlook.  

That doesn’t mean that there haven’t been bumps in the road.  Particularly during the challenging times surrounding the Great Recession of 2008-09, some of our minority managers initially underperformed – as did some of our non-diverse-owned firms.  Importantly, we didn’t jump to conclusions or abandon our goals. We made clear that our commitment to diversity would remain intentional and that we were in it for the long haul.  In time, those funds recovered.   

In sum, our diverse managers are judged on their merits, both when we initially invest and when we decide on retention.  Like every manager we employ, they win (and can keep) their place at the table through proven performance over time. 

Again and again throughout history, our nation and society have benefited when more people have been given the opportunity to compete and succeed through their own talent and hard work.  The financial industry is no different.  This is one of many reasons for philanthropies to examine their operations from top to bottom, looking for ways to encourage greater diversity.  Let’s use every tool at our disposal to compel the businesses we work with to open doors of opportunity that have been shut for far too long. 

Laura Kernaghan is senior director of investments for The Chicago Community Trust.

Image (top) by The Chicago Community Trust.