“It is a part of your fiduciary duty to invest the fund’s assets in a prudent manner. Investing with diverse asset managers that demonstrate outperformance and deliver strong returns is more than prudent, it is wise.” 

That is the Chicago Teachers’ Pension Fund (CTPF) strategy in relation to diversity and inclusion (D&I), according to its chief investment officer, Angela Miller-May. 

Indeed since the early 1990s, CTPF has been a pioneer among US pension and retirement systems on D&I. The issue has become even more important and sensitive after the recent increased attention to racial biases in all aspects of American life through the prism of the George Floyd protests and the Black Lives Matter movement.

“Diversity and inclusion is becoming more and more a focus for all organisations,” says Lauren E Mathias, a senior-vice president and non-US equity investment consultant in Callan’s global manager research group, and also the manager in charge of the Callan Connects programme since it began in 2010. “Our research team asks all firms about how they integrate D&I in their organisation at all levels, from the executives to all employees. The attention to this factor is based on research that shows that a more diverse organisation can achieve better results. We know that the financial industry has a long way to go to be more diverse.”

A case in point is the small number of US mutual funds run by minority-owned firms. They held less than 1% of the industry’s assets at the end of 2017, according to a study by the Knight Foundation.

Now pension funds are also under scrutiny over whether they have done enough to hire diverse money managers. In June, for example, the $74bn (€62bn) New Jersey (NJ) state pension fund was sued for racial bias by the black-owned investment firm Blueprint Capital Advisors. It alleged that the NJ fund was averse to hiring money-management firms owned by minorities. That is even though the state of New Jersey has a law requiring its pension fund to try to hire women and minority-owned firms.

Angela Miller-May

“The Illinois state requires state pension funds try to allocate 20% of assets to firms owned by women, minorities, and people with disabilities, but our fund started its diversity programme before that mandate,” says Miller-May. CTPF invests 45.8% – $4.8bn – of its $10.5bn asset base with minority, women and disabled-owned business enterprise firms as of 31 May 2020. Almost 27% is invested with women-owned firms; 10.3% with African-American owned firms and 7.4% with Latino-owned firms. 

“We hire our minority managers with a competitive RFP [request for proposal] process,” says the CIO. CTPF specifically evaluates and selects managers that have reasonable and repeatable investment strategies, rigorous risk management, a stable structure, solid track records for key professionals, an experienced and tenured cohesive investment team with a strong record of business ethics. 

“Our minority-owned managers perform just as well as mainstream managers; they are doing what we hired them to do,” says Miller-May. “Women owned firms have proven to be very meticulous and detailed, more risk averse and conservative, and their performances are steady. Many diverse managers have their livelihood tied to their firms, so they work more diligently to find different and unique solutions, have a very strong work ethic, are very responsive and very good partners to CTPF. They also pay a lot of attention to ESG issues. We are pleased with the results because our long-term total performance beats our benchmarks: an annual net-of-fees 8.05% vs the 7.78% benchmark, since inception.”

Other pension funds that are committed to D&I are the $211bn New York City Retirement Systems and the $201bn New York State retirement system. At the end of 2019, the former had $13.6bn managed by minority and women-owned business enterprises (MWBEs), which was about 11% of actively managed assets, up about 40% since 2013. In the 2018-19 fiscal year the latter had $21bn invested with or committed to MWBEs that now represent almost  a quarter of its externally managed active mandates.

Lauren Mathias

Callan’s institutional clients have a total $27bn of assets managed by diverse, women, and disabled-owned (DWDO) firms. There are 344 DWDO firms or 20% of total managers in Callan’s database. “It started with quarterly meetings with firms we had never met: they must be over 50% owned by minorities and/or women,” says Mathias. 

“A large part or our clients investing in diverse firms are public pension funds, also because of state laws. Many of the diverse firms are smaller and newer so they don’t have a long track record, so in order to mitigate risks we pay more attention to their investment process to see if it is consistent, repeatable. We also look into the experience of their team, whether they come from other firms and what previous track records might be available for review.”

One challenge with diverse firms, according to Mathias, is that many specialise in active management of US equities, which is not an area of recent success, in terms of investment performance. “But our Connects programme has been successful,” she says, “if you look at the growth of the assets that our clients invest with diverse firms – from $18bn in 2016 to $27bn now.”