Pockets of the asset management industry are showing signs of deliberate and powerful change when it comes to actively diversifying investment teams and reorienting conventional thinking.
Creative, well-researched and imaginative ideas, translated into business economics, generally form the basis of good investment returns. It stands to reason the investment teams that come up with those ideas are the ones that outperform their peers. But in order to generate wide-ranging, dexterous and outside-the-box thinking, those teams need to be diverse.
When it comes to actively diversifying investment teams and reorienting conventional thinking, pockets of the asset management industry are showing signs of deliberate and powerful change.
Capital Group is one of the largest investment management organisations in the world, with US$1.8 trillion ($2.5 trillion) in assets under management.
The group’s investment process has been honed and redefined many times over the organisation’s 87-year history but there remains a fastidious focus on making sure those debating and interrogating the investment ideas practise cognitive diversity.
“There is no style, thinking process or investment result that is the same in any of our funds,” says Paul Hennessy, managing director of Capital Group Australia, where 18 per cent of the portfolio managers are women. “Diversity is the very foundation of how the investment process works.”
There’s a similar message behind the Future Impact campaign, headed by Mercer’s Yolanda Beattie and funded by a prestigious collection of Australian superannuation and fund managers.
In a world of low economic growth, where investment firms need to work hard for returns, there is a movement of teams eager to form and support the next wave of asset managers – particularly women and those from a variety of different cultures – because they believe that’s where the new ideas lie.
Future Impact has a mandate to shift the perception of the hyper-masculine, blokey money management industry and instead present a powerful, layered sector that has real capacity to put its money where its mouth is and effect global change.
For a young, female university student or newly arrived migrant, that could be an incredibly compelling proposition. But as asset managers around the country are realising, attracting and retaining diverse talent, particularly women, is much more difficult than just advertising more widely and hoping they disrupt ingrained cultures themselves.
THE CRITICAL MASS FACTOR
As it stands, the industry is filled with teams of largely white, extroverted men, making it difficult to find new and different points of view. That’s not to say the existing industry lacks capability or insight; rather, the ways of approaching problems stem from a narrow set of lived experiences.
Each year, Mercer conducts a study with asset managers and owners, using surveys, focus groups and interviews to discover the levels of diversity within the industry. The concept of diversity is often difficult to measure, but Mercer looks across gender, cultural background, age, socioeconomic background and educational qualifications.
This year’s study found that 76 per cent of investment managers are male, 48 per cent are private-school educated (compared with the national average of 35 per cent) and 76 per cent of those who completed postgraduate studies have a master’s degree in finance.
Additionally, the study found female investment managers are up to 30 per cent less likely to be promoted through the ranks and up to 50 per cent more likely to leave the industry than men.
“It’s this churn-and-burn factor that means the power of diverse thinking fails to land within an organisation,” says Beattie, who is diversity and inclusion practice leader at Mercer. “You’ll have [diverse personnel] come in, be presented with an established critical-mass view, and then just leave.”
Despite the best intentions at the recruitment level, female colleagues find their ideas rarely penetrate the existing discussion and their insight and investing strategies are often at odds with the critical mass point of view.
“While obviously every person is different, women are often driven to self-improve, rather than to beat peers. They largely have a preference for people over process and have vastly different problem-solving processes,” Beattie says. “The value of making room for those different perspectives, alongside the established way of thinking, is that teams will likely come up with several solutions to a problem, rather than the obvious one.”
Acknowledging the critical mass factor, and the limits it places on progressive discussion, is the first step towards restructuring the industry into a sector that welcomes new people.
Capital Group structures its funds around a team of investment managers, each in control of their own individual portfolio, operating within the parameters of the fund. It’s called the Capital system.
They execute their own strategies and are compensated on their own individual investment returns, while the Capital Group client receives the overall performance of the fund.
“It’s just fascinating to watch the different ways people interpret stocks and markets, they are always surprising,” Hennessy says. “Some are very conservative with very low turnover rates, some have concentrated portfolios of 20 stocks, some have 60, and we’ve worked hard to allow all those strategies and patterns to coexist.”
As demonstrated by its 45-year-old global equity strategy, the New Perspective Fund, this approach has led to consistently strong investment returns at typically lower-than-market volatility.
This is at odds with many traditional funds that have a star portfolio manager whose team members debate and pitch investment ideas amongst themselves. Often, left-field ideas are overlooked or even unrecognised.
In addition to cognitive diversity, Capital Group also believes diversity of location is important and the organisation has investors across the globe – including in New York, Los Angeles, London, Geneva, Tokyo, Hong Kong, Singapore, Beijing and Mumbai.
When it comes to gender, Capital Group is deep into a program they started five years ago designed to encourage women to join the investment teams. “What we found is that our challenge is not retaining and promoting women; rather, it’s encouraging young graduates to consider investment management as a career,” Hennessy says.
And there’s been progress. Capital Group’s 2018 intake of analysts and portfolio managers has secured a 48 per cent participation rate for women, a high number by most industry gender metrics, but Hennessy says it’s a continual work in progress.
“We are very intentional about our diversity dialogue and programs we put in place; for example, in the number of women we employ as portfolio managers,” Hennessy says.
Beattie agrees that women are difficult to pin down as a homogenous group of investors, just as men come at things with different approaches.
“Very rarely do women want anything other than just to get on with the job in their own way,” she says. “It’s when everybody connects to compassion that vigorous and progressive discussion is really allowed.
“The financial planning industry has suffered such terrible reputational damage that there’s a fabulous opportunity to re build and re-engineer how the teams work and who is in them. The vast majority of people just want to do good work.”