Asset Owners Big on Talking ‘Diversity’

Nearly three quarters of asset owners mention diversity in their annual reporting, but less than half are taking action to achieve it, a study has found. U.K. think-tank New Financial studied the annual and investment reports of 100 asset owners with combined assets of more than $8 billion, and conducted interviews, to produce the report “Diversity from an Investor’s Perspective.” The research was inspired by the New York City retirement system, which stated in May 2015 plans to formally include diversity in its asset manager selection criteria.

Large U.S. pension schemes lead the way on diversity monitoring, according to New Financial, which also highlighted instances of “best practice” in asset owners’ reports from Australia, Denmark, the Netherlands, and the U.K.

“Diversity is beginning to influence manager selection,” the report concluded. “Diversity questions are coming up more frequently in requests for proposal, there are more of them and they are more focused,” it said.

Only 13% of allocators surveyed said they use diversity as a theme in portfolio decisions, but the study indicated more investors are engaging with their managers on the issue.

Such conversations are mutually beneficial, according to Michelle Scrimgeour, chief executive officer, EMEA, at Columbia Threadneedle Investments, which collaborated on the study. Diversity ensures that fund managers make “better decisions” for their clients, she said in a statement. “For meaningful change to be achieved, diversity needs to run through the entire supply chain.” In her experience, “asset owners are beginning to flex their muscles by asking questions and holding asset managers as well as the companies in which they invest to account.”

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Nevertheless, boards of U.K. pension funds are “overwhelmingly pale, male and stale,” the report stated. More than four out of five trustees in the U.K. are men, according to New Financial, and 28 percent are ethnically diverse.

The Pensions and Lifetime Savings Association — which represents U.K. pension funds — has been trying to address the issue, including via an educational campaign on the benefits of diverse asset management and pension fund organizations. The association also released best practice guidelines for recruiting and training scheme executives.

But the PLSA’s former chairperson, Lesley Williams, said “a long road ahead” remains until the industry reaches full inclusivity.

“Recent research by the PLSA has shown that only 49 percent of trustees believe that they are diverse in terms of gender,” she said. “As little as 28 percent of trustees believe that they’re ethnically diverse. We must all work together to make sure changes are made throughout the world of finance.” There is a large stack of research, going back over many years, which backs the assumption that a more diverse investor group correlates with better returns. Research conducted by McKinsey in 2015 found that “companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their national industry medians.” A Thomson Reuters report released in 2014 found that companies with mixed-gender boards “perform marginally better, on average, compared to a benchmark index, such as the MSCI World.”

In an interview with the New Finance report authors, Michael Kinney, senior research specialist at Mercer, said the investment consultancy has “upgraded and downgraded managers where diversity has been a factor in the decision.”