Although most asset owners recognize the need to increase investment diversity, they often believe it comes at the risk of reduced financial performance. To better understand how asset owners incorporate diversity into their investment priorities and selection of external managers, Morgan Stanley conducted an inaugural poll of large U.S. asset owners. Researchers reported four key findings.
1. Diversity is a top priority for investment decisions. Asset owners recognize the importance and impact of incorporating diversity into investment decisions, with diversity and inclusion becoming an even higher priority over the last year.
D&I is the top ESG factor that asset owners consider for their organizations’ investment decisions, and 89 percent of asset owners say that the diversity of external managers is important or a top priority.
Asset owners appear to be putting this prioritization into practice, with 67 percent saying their organizations have policies that incorporate diversity as part of an ESG requirement for making investment decisions.
2. Perceived financial trade-off presents a hurdle. Despite the prioritization of diversity and recognition that diversity can improve investment performance, most asset owners say that incorporating diversity into their investment decisions comes at the expense of returns.
A majority (56 percent) agrees that they must choose between financial gains and incorporating diversity into their investment decisions, revealing there may be deep-seated skepticism about diverse external managers yielding strong returns.
There is a sizable perception gap by race, with 70 percent of white asset owners agreeing compared to just 35 percent of multicultural asset owners.
3. Public pension funds are leading the way. The industry can look to public pensions for evidence of impact and inspiration for how to diversify external managers.
Public pension funds are much more likely than their peers to value diversity in investment decisions, perhaps due in part to their own diversity and longer exposure to diverse investment teams.
Public pension fund asset owners are more diverse by gender and race compared to other types of asset owners.
4. Need for more accountability. There is room for more formalization, standardization, best practice sharing and accountability measures when it comes to diversifying external managers.
Just 38 percent of asset owners always ask questions about diversity in their due diligence processes when deciding whether to invest with an external manager, with another 49 percent saying they sometimes ask.
“The results point to an important challenge for the industry: While asset owners say that diversity is important, most — especially white investment professionals — perceive a negative financial trade-off that comes with prioritizing diversity,” according to the survey report.
Further, only 43 percent of asset owners use a formal measurement tracking system to keep tabs on their external managers’ progress on their D&I targets.
Another challenge to address is that more than one-third of asset owners report having difficulty investing with diverse managers (38 percent for multicultural managers and 35 percent for women managers), with few differences by respondent gender and race/ethnicity.
Steps to take
Morgan Stanley recommends several steps the industry can take to encourage more asset owners to recognize the benefits of a diversity-based investment approach:
- Publish industrywide data highlighting returns from diverse external managers.
- Showcase real-world financial benefits of using emerging manager programs to identify new opportunities with newer, smaller and more diverse investment management firms.
- Establish standardized practices to formally track external managers’ progress on meeting diversity targets and hold them monetarily accountable for failing to reach targets.
- Encourage asset owners to instill additional transparency measures around how much of their own organizations’ assets under management are invested with diverse external managers.
- Elevate leaders who have shown a commitment to investing time, resources and effort into creating meaningful change around diversity within the organization, including instituting formal policies.
- Require consultants to maintain a list of diverse managers for consideration, similar to the way corporations require recruiting agencies to present diverse candidates for senior positions.