Consultants focusing more on DEI efforts of managers they evaluate

Investment consultants are building up their prowess on the diversity, equity and inclusion practices of the money managers they recommend.

Boston-based NEPC, for example, is attracting new clients that are motivated by strong demand for better evaluation and measurement of money managers' DEI and ESG practices, said Steven F. Charlton, partner and director of consulting, in an interview.

The new clients hiring NEPC for its DEI focus primarily are moving from other consulting firms that are "falling behind or are not up to speed" on evaluation and selection of diverse-owned managers, Mr. Charlton said. He declined to name any new clients.

NEPC focuses its DEI manager evaluation on diverse-owned firms (at least 50% company ownership by underrepresented groups) and diverse-led managers (between 33%-50% company leadership by diverse employees), according to the firm's first internal DEI report based on data from 2020.

In 2020, 40% of NEPC's clients invested a total of $34.7 billion in strategies managed by diverse-owned and diverse-led firms, the report showed. NEPC had worldwide institutional assets under advisement of $1.37 trillion as of June 30, up 22.6% from the prior year, according to Pensions & Investments' annual consultants survey.

Some consultants have been measuring money manager diversity for decades.

Wilshire Advisors LLC, Santa Monica, Calif., for example, has been tracking and analyzing data on diverse-owned managers since the late 1980s and now has identified 225 diverse-owned public- and private-market managers for use in manager evaluations, said Joanna L. Bewick, Pittsburgh-based senior vice president, portfolio manager and chair of the firm's diverse-owned manager committee.

Ms. Bewick said the number of Wilshire's investment management clients that invested in diverse-owned firms rose to 34.7% in 2020 compared with 22.7% in 2019 and 19.8% in 2018. As of September this year, an estimated 37.4% of Wilshire's discretionary and non-discretionary clients hired diverse managers.

Like NEPC, Wilshire focuses its evaluation of money managers on the diversity the company's owners, Ms. Bewick said, noting "company owners chart the course of the company and set the tone."

Wilshire revamped its diverse manager program in 2018 to include measures such as presenting at least one diverse manager in every public market manager search for clients; a diversity education program for clients, diverse-owned managers and Wilshire employees; and the addition of discretionary compensation for senior consultants tied to the quantity and quality of their interactions with diverse-owned managers, Ms. Bewick said.

Wilshire had $1.08 trillion in worldwide institutional assets under advisement as of June 30, up 10.7% from the prior year, P&I survey data showed.

Industry sources said the death of George Floyd, a Black man, by Minneapolis police in May 2020 was the catalyst for asset owners and consultants alike to make changes to better incorporate DEI principles into their money manager evaluation, due diligence and hiring practices.

"People had an awakening last year after the death of George Floyd. It brought a lot of attention to DEI principles, and the industry is moving toward thinking about money managers more holistically," said Lauren E. Mathias, senior vice president and non-U.S. equity investment consultant in San Francisco-based Callan LLC's global manager research group.

She also has oversight of Callan Connects, a program that specializes in coverage of emerging, diverse-, women- and disabled-owned money management firms.

While asset owners aren't necessarily firing money managers that lack diversity, Ms. Mathias said Callan is fielding more questions about manager diversity, and the number of RFPs seeking diverse managers is on the rise.

Historically, public pension funds have broadly adopted strategies run by diverse managers, but corporate pension funds, endowments and foundations increasingly are seeking diverse managers, she said.

Callan recently expanded its evaluation of money managers from a focus just on the diversity of the owners of the firm to measuring diversity throughout the entire firm, Ms. Mathias said.

"We want to see improvement in managers' diversity measurement across the company so we can gauge the firm's recruitment and retention of employees from underrepresented groups and how they are promoted to eventually become senior leaders," Ms. Mathias stressed.

Callan had $3.22 trillion of worldwide institutional assets under advisement as of June 30, an increase of 27.6% from the prior year.

Sources said manager diversity isn't a new concept for asset owners, especially public pension funds, given that many have maintained dedicated emerging manager programs with some focus on small diverse- and women-owned managers for years, but the goal now is to invest in a broader array of diverse managers.

"Diversity has always been an important topic, one we've been talking about for a long time, but not enough investment (management) firms were implementing practices to include more diverse employees. It's been around. It hasn't just come out of the blue," said Judy Chambers, managing principal and private markets consultant in the New York office of Meketa Investment Group Inc.

Ms. Chambers said that since Mr. Floyd's death, Meketa's investment consulting clients are "even more vocal and want more information about DEI. It's taken on more importance across the board. During (asset owner) board meetings, trustees are asking hard questions of money managers about their diversity practices," Ms. Chambers said.

Meketa has "always asked questions about the diversity composition of money managers across the firm, beyond the ownership level as well as watching to see whether people are being promoted and other issues. We include these questions in our due diligence requests of all managers," Ms. Chambers said.

Meketa and its investment consulting clients want to "know and track what a money manager's plan is for hiring and promoting people within the company. Diversity within a company is about much more than the firm just writing checks to non-profit organizations. It's about the makeup of the workforce," Ms. Chambers said.

Meketa had $2.69 trillion of worldwide institutional assets under advisement as of June 30, an increase of 22.4% from the year before.

Diverse-owned money managers are to some extent at the mercy of investment consultants when it comes to being included in searches, despite demand from asset owners for their inclusion.

In terms of a diversity focus on money managers by investment consultants, 23 of the 71 firms in P&I's universe said they have a diverse-manager search policy.

"The vital signs are going in the right direction for more hires of diverse managers," said Tina Byles Williams, founder, CEO and CIO of diverse-owned Xponance Inc., a Philadelphia-based money manager that focuses on multimanager strategies utilizing emerging and diverse firms, in an interview.

That said, Ms. Byles Williams stressed that "there is an absence of exposure for diverse-owned firms and what often happens is that an asset allocator will ask a consultant to take a look at a particular manager. If that happens for Xponance, we have a better than 50% shot of winning the business."

However, building the firm's business "asset owner by asset owner takes a lot of time and it's dependent on me to get to know a lot of allocators. A more scalable model would be for consultants to take a look at our firm because we're a good manager, not just because we're diverse-owned," she said.

Xponance managed $13.5 billion as of Sept. 30.

At least one executive of a diverse-owned money management company is somewhat skeptical about the internal efforts investment consultants are undertaking to increase the diversity of their workforces.

"Most of the largest consultants have the greatest room for (internal) improvement with D&I (diversity and inclusion) initiatives" said Gilbert A. Garcia, managing partner at Houston-based Garcia Hamilton & Associates LP, a diverse-owned firm, in an emailed comment.

"It starts by setting a strong tone at the top; doing an honest self-evaluation both on internal D&I metrics and outside business practices; making D&I goals part of the financial metrics in setting selection data; and (avoiding) professional conflicts of interest," Mr. Garcia said.

Garcia Hamilton managed $18.3 billion as of Nov. 10.