Feature – Diversity
This, in turn, led to action. “In 2015, we started to vote against the boards and chairs of FTSE100 companies that did not have any females on their board. We started with the largest compa- nies,” Payn adds. “That came from the fact that you cannot boil the ocean, you have to start somewhere sensible. The largest companies should essentially be showing leadership here. “This has escalated over the years that we now expect the FTSE350 to have at least 30% of its directors to be women. We would like to have more – we would like gender parity.” The voting has also been focused for Payn. “Voting against annual reports and accounts is not going to have the same impact – I know that is how some investors may vote – but that is not the way we have voted because it is direct accountability to the chair that truly has an impact,” she says. And there are slightly different approaches in different coun- tries. “We have policies for the US, which on the gender side of things has been slightly slower on the uptake than the UK mar- ket, and France, which has quotas. We align with those quotas in our voting. “But across the board, we expect 30% minimum representa- tion,” she says. “We know for some countries, such as Japan, this is challenging.” Payn notes there has been a similar approach on a racial basis. “On ethnicity, we launched our engagement campaign 18 months ago and are clear on what our expectations are, which, again, focus on large companies in the FTSE100 and S&P500. We took ISS data and wrote to all the companies that did not meet the one person of ethnicity on their board by the end of 2021, which is needed to align with the Parker Review in the UK.”
ASSET OWNERS AND DIVERSITY What should asset owners do to address diversity in their portfolios?
“What the Asset Owner Diversity Working Group is doing is exciting,” Payn says, “because what we are doing as asset man- agers, is on behalf of the asset owners. We are all on this jour- ney together.” Meredith Jones at Aon highlights a four-step approach asset owners should take. “We believe that investors should take a holistic view of diversity when trying to make changes to the levels of diversity in their portfolios. “We believe that a four-step process focusing on: purpose, pipeline, pedigree and process makes the most sense,” she adds. “That way you are focusing on all four of the major inflec- tion points that are required to truly boost diversity in a portfo- lio specifically and in the industry in general.” But Gunnee says that diversity is more than just being seen to be doing something about it. “While we are excited to see an uptick in diversity, equality and inclusion from asset owners,
40 | portfolio institutional | April 2022 | issue 112
simply taking meetings with diverse fund managers is not suf- ficient,” he adds. “Asset owners must address systemic biases in their diligence process as well to be successful.
DIVERSITY ASSET MANAGERS Are enough groups represented within asset management firms to translate diversity into investment strategies?
“Representation in the industry certainly has a way to go but we do not see the pipeline as the problem,” Gunnee says. “At Cambridge Associates, we have built portfolios that are not only exceeding their return targets, but also have more than 30% of their portfolios invested with diversely-owned funds.” Jones gives some insight into the situation. “In some strate- gies, there are plenty of women and diversely-run funds. The bigger question is how large are those funds and can they absorb an institutional allocation? “This is less of a numbers issue and is more of a how many women and minority-run funds are out there of sufficient size to be able to absorb an institutional allocation without it becoming a majority of the portfolio. So, I suppose the short answer is, yes and no.”
MAJOR OBSTACLES What are the main barriers for investors to include diversity in their investment approach?
“Despite the research available to the contrary, investors still believe you need to sacrifice returns to invest with women or people of colour,” Gunnee says. “The investment industry has long subscribed to the value of diversification within portfolios. To move forward, investors must understand that until we use an inclusive and equitable investment process to consider all fund managers, we are leaving money on the table. “Our firm believes
that strong investment performance
depends in part on the diversity of ideas, backgrounds and experiences of the managers with whom we invest on behalf of our clients.” For Jones, size matters. “I believe it’s hard to over-estimate the issue of fund size. So many institutional investors cannot be more than 10% or 15% of a fund’s total assets under manage- ment. As a result, for smaller funds, getting allocations from institutions may just not be practical.
“If you have a $75m (£56.8m) fund, for example, an allocator may only be able to give you $7.5m (£5.6m),” she adds. “For a multi-billion dollar plan that number does not move the nee- dle. So, we need to focus not just on the number of diverse managers but also the scalability of those managers.”
INVESTMENT APPROACHES An Aon report has revealed that one of the most popular
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