Asset Manager Diversity Linked to Better Investment Returns
"Failing to deliver optimal diversity of thought" is "bad for savers," Willis Towers Watson says.
Financial advisors may want to add diversity and inclusion to the metrics they use when assessing asset managers.
According to a new study from Willis Towers Watson, a global consulting, risk management and insurance brokerage firm, the more diverse an asset manager’s investment teams, leadership and ownership, the better the investment outcome for clients.
“Improving diversity is key to building a stronger investment industry, and our initial findings show it is positively linked to performance outcomes,” according to the report.
In its manager research efforts directed at diversity, Willis Towers Watson focuses on the diversity of investment teams and leadership — “the primary source of alpha generation” — as well as diversity of ownership when assessing an asset manager’s competitive advantage.
Its analysis of diversity and performance outcomes of 400 investment products across a number of asset classes over several years found that investment teams that were ethnically diverse tended to generate better excess return.
Given these results, the firm notes it may downgrade the rating of an asset management firm if, when working to improve its diversity, the firm fails to encourage greater diversity or doesn’t respond to growing asset owner expectations.
“The diversity characteristics of the asset managers in our industry are a long way from being representative of the broad society,” according to the report. “This implies we must be missing out on talent and failing to deliver optimal diversity of thought, which is bad for savers.”
The study recommends several steps for asset managers to improve diversity, including:
- Greater transparency and disclosure about diversity within different firm functions
- Increased sourcing of diverse talents through graduate programs and programs for professionals returning to the workforce
- Progressive compensation structures and policies around flexible working arrangements
- A shift away from a star portfolio manager model to a team-based investment approach, with a strong focus on diverse decision-making teams
- A focus on internal policies, training and networks designed to increase diversity and address challenges of racism
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