Report: diversity in portfolio management
September 2018 • Driving diversity • by Olivia Seddon-Daines & Yasmine Chinwala
There is broad consensus that diverse voices enhance investment performance by increasing diversity of thought, which improves decision-making and investment idea generation while guarding against groupthink. But the industry has a long road ahead to cultivate the diverse workforce that can bring all these benefits. This report identifies the practical barriers to diversity in portfolio management, analyses what individual firms are doing to address these challenges – and highlights how the industry can work together to accelerate change.
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Financial services firms are under ever-increasing pressure from government, regulators and clients to recognise the importance of a diverse workforce and strive to improve the diversity of their staff, and quickly. Yet there are some sectors of the industry – including asset management – that don’t appear to be responding to this pressure as urgently as they could.
This research aims to understand in tangible terms what it is about the asset management industry – and portfolio management specifically – that makes building a diverse workforce so challenging. It provides an overview of the concrete steps some firms are already taking to improve diversity, and a practical guide to what needs to happen in order to accelerate the pace of change. While this report is specific to asset management, many of the themes are equally relevant to other sectors of financial services. The report makes for uncomfortable reading for the industry, but we hope it provides some practical and constructive guidelines to help drive change. Our analysis looks at:
* Setting the scene: how diverse is the universe of portfolio managers? Why does this matter, and why now?
* What does it take to be a portfolio manager?: what is the essential skill set to become a successful portfolio manager? And what has become the expected norm?
* The barriers to entry and progression in portfolio management: we identified nearly 20 practical barriers. Are they unique to this industry? Do the barriers disproportionately impact women and people of diverse backgrounds?
* The industry’s response: what are asset management firms doing to improve diversity?
* The challenges ahead: our reflections and analysis of what the industry still needs to do to prompt a sustainable change in portfolio management.
Here is a short 10-point summary of Diversity in Portfolio Management:
1) Moving up the agenda: diversity is moving up the agenda of the asset management sector. In the context of portfolio management, there is a broad consensus that diverse voices enhance investment performance by increasing diversity of thought. This in turn improves decision-making and investment idea generation while guarding against groupthink.
2) Under pressure: asset managers are under increasing pressure to improve diversity – and quickly – from both external and internal sources. Government, regulators and clients all want to see increased representation from women and minority groups, while employees are also becoming frustrated by the glacial pace of change.
3) Starting from a low base: our research paints a stark picture of portfolio management dominated by white, middle class, straight men. Only 4% of UK fund assets are managed exclusively by women, compared to 85% run by men. During our research we came across only 12 black portfolio managers based in London, and nearly two-thirds of the industry’s leaders went to private schools.
4) The ideal portfolio manager: Our research found that the essential skill set for a PM includes numeracy, intellectual curiosity, analytical ability and an aptitude for learning. However, this broad view of who could become a PM does not reflect the reality of the narrow, subjective criteria that determine who actually makes it.
5) Barriers to entry: we identified 18 practical diversity barriers to entry and progression for portfolio managers. The top ranked barrier is the meritocracy myth: the asset management industry firmly believes that the best will rise to the top, that “merit” is objective, and that companies promote and reward staff based purely on performance – but that is simply not true.
6) A generalist approach: asset management firms are not yet tackling the lack of diversity in portfolio management specifically – nor does it appear to be a priority. While they recognise barriers to entry and progression exist, there is a relative lack of understanding of how these barriers are prioritised and their cumulative effect.
7) A collaborative effort: our research found a distinct lack of collaborative spirit amongst asset managers. The biggest barriers cannot be tackled by any one firm on their own – peers will need to come together to discuss and set industry standards, and work with the wider investor community, including asset owners, investment consultants and regulators.
8) A disconnect: there is little alignment between the biggest barriers and the most common actions taken by firms to improve diversity. Only one of the top five actions points we identified directly answers a top five barrier, and we observed very little activity in response to the remaining four barriers.
9) Signs of change: asset management firms have begun a concerted effort to review, update and formalise their HR policies. While they may not be breaking new ground compared to other business sectors, this shift signals an encouraging change in thinking for the industry.
10) Widening the gene pool: the industry is also turning its attention to improving diversity at entry level and raising the profile of asset management as a career to feed the future pipeline of portfolio managers. Firms are playing a more active role in graduate recruitment by introducing structured programmes and looking beyond STEM graduates and the same handful of universities.
New Financial conducted meta research to build a dataset on diversity amongst portfolio managers across as many diversity strands as possible. We also conducted interviews with more than 100 market participants from over 40 firms across the asset management industry, including portfolio managers (both past and present), aspiring portfolio managers, chief investment officers, asset owners, investment consultants, heads of HR, and heads of diversity and inclusion.
This research was conducted by New Financial in collaboration with the Diversity Project, and was supported by Allianz Global Investors, Hermes Investment Management, and GIC.
The full report:
The full report Diversity in Portfolio Management includes the following:
1) A summary of the most important main barriers to entry and progress, and to the most common actions being taken to address them.
2) A summary of why diversity is important in asset management – and particularly in portfolio management – and the pressures on the industry from different directions to improve diversity
3) A summary based on meta-research of the lack of diversity in portfolio management across gender, ethnicity, socio-economic background, LGBT+, disability, and age.
4) A summary of what market participants (portfolio managers, clients, investment consultants and heads of HR) think are the eight most important attributes for a portfolio manager.
5) A summary of the traditional personality profile and educational background of portfolio managers.
6) An analysis of what asset management firms are doing to improve diversity, based on structured interviews and the narrative section of the gender pay gap reporting by more than 40 asset management firms and grouped into 10 main themes.
7) A call to action with 10 ways in which the asset management industry can take a more ambitious, collaborative and bold approach to improving diversity