An Asset Owner Guide For Investment Portfolios


Women- and diverse-led firms control only 1.4% of the more than $82 trillion managed by the US asset management industry. The road to achieving a diverse, equitable, and inclusive (DEI) investment value chain is long. As the ultimate owners of capital, asset owners have the ability and responsibility to drive DEI within investment management teams and portfolios and across the asset management industry.

This past summer and fall, Milken Institute Senior Director Blair Smith, Troy Duffie, and I worked alongside the Milken Institute’s DEI in Asset Management Executive Council within its Center for Financial Markets on a guide for asset owners to increase the racial, ethnic, and gender diversity of their investment portfolios. The guide is also for consultants who advise them and asset managers who seek to become part of their investment portfolios.

The guide outlines four components on the path to inclusive capitalism: incorporating diversity and inclusion into governance; sourcing diverse talent; underwriting equitably; and committing to equitable monitoring and engagement.

Pillar One: Incorporate Diversity, Equity, and Inclusion into Governance includes diversifying investment committee composition and culture, training the team on diversity, incorporating DEI into investment beliefs, adding DEI to investment policy statements, inserting DEI clauses into limited partnership agreements and side letters, designing and implementing a plan to collect diversity metrics, signing diversity pledges, reporting and publicly disclosing diversity, and establishing a structure and incentives conducive to diversity.

Pillar Two: Source Diverse Talent consists of building diverse investment teams, sourcing diverse investment firms, and investing in diverse portfolio companies. This includes expanding the search beyond traditional talent pools, as well as reporting on the progress of hiring diverse talent.

Pillar Three: Underwrite Equitably considers a new risk paradigm that involves lowering and/or forgoing minimum general partner (GP) and limited partner (LP) commitments, minimum track records, and fee breaks when underwriting and negotiating with diverse emerging managers. Investors should holistically assess inclusion at the investment team, investment portfolio, and service provider levels.

Pillar Four: Commit to Equitable Monitoring and Engagement entails establishing an asset manager baseline for LPs and measuring their progress over time, thus increasing the diversity of existing asset managers and amplifying their overall influence.

The road to achieving a diverse, equitable, and inclusive investment value chain is long. As the ultimate owners of capital, asset owners have the ability and responsibility to drive DEI within investment management teams and portfolios, and across the asset management industry.

The mechanisms to accelerate change are available in the industry. For example, investment consultants have traditionally met with asset managers and provided the initial investment memo. Investment officers for asset owners may consider inverting the traditional process by meeting with diverse asset managers for the initial screening and providing the first draft of the investment memo to the investment consultant.

Naturally only a limited number of institutions have the internal capacity to execute on this strategy, but by inverting the process, investment advisors who are not informed or interested in responsible investing strategies, including impact investing, can look to other LPs for guidance on diverse managers where the diligence has already been conducted. The power to enforce this strategy and the others laid out in the industry rests in the purview and power of asset owners.

As the landscape of diversity, equity, and inclusion continues to evolve, an open exchange of ideas about best practices for inclusive investing is critical to increasing the percentage of the US asset management industry that is controlled by women- and diverse-owned firms.



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