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Feature | Trustee diversity


After being overlooked for many decades, the topic of diversity and inclusion has arrived in the asset management sector with a bang.


In 2016, trade body the Investment Associ- ation launched its Diversity Project to push the issue up the industry’s agenda. It ini- tially focused on the gender imbalance within the higher ranks. Then two years later, its #Talkaboutblack initiative began tackling the thorny subject of ethnicity in the investment sector. LGBT+ issues are also on the list that need addressing. Let’s be clear, many of these asset manage- ment companies are not changing their decades-long operational make up due to a sense of civic duty. There is increasing evi- dence that diverse teams produce better results. After a decade of losing market share to passive investment vehicles, active managers need all the boost they can get. Research cited in the US Proceedings of the National Academy of Sciences journal in 2014 tested two groups of traders to see how accurately they priced stocks after looking at the fundamentals of their associ- ated


business. It found that the more


diverse group of traders had a greater than 50% probability of setting accurate prices than a homogenous group. Additionally, overpricing was higher and traders’ errors more correlated by the homogenous group than their more diverse counterparts. More generally, a study by McKinsey in 2014, which was repeated with similar results three years later, found companies with ethnic and cultural diversity, had around a 35% likelihood of outperformance on an EBIT margin.


This is not lost on asset management chief executives, who have seen their margins squeezed dramatically over the past 10 years. PwC, which has done considerable work on this topic, found in 2018 that 85% of financial services chief executives see promoting diversity and inclusion as a priority. Purna Bhudia, head of credit at the Pension Protection Fund (PPF), says that the asset management industry had been “operating in a stereotypical environment for decades”.


“It has been shocking,” she adds. “People look to recruit in their own image and in asset management in particular, we are very behind the curve.” Bhudia sees change coming to the sector, however, through a shift of focusing on star managers to teams.


“What is needed in a team is five or so peo- ple who think differently,” she adds. “You need people who think linearly and laterally – and for all of these voices to be heard.” A watershed study by Katherine Williams Phillips of Columbia University and Charles O’Reilly of Stanford University in 1998 examined people working in teams of two to five. They found their collective intel- ligence rose with the number of women in the group. This, they considered, might be due to women’s higher performance on tasks requiring social sensitivity. More recent research from Credit Suisse also found greater team diversity can lead to better performance. The Swiss bank con- cluded this was not necessarily due to the performance of the minority individuals, but that majority group improved its own performance in response to working with new people.


IT’S A MAN’S WORLD Evalinde Eelens sits on the board of three Dutch pension funds and has previously been investment manager at Mars’ pension schemes in EMEA.


She has seen how boards reflect the wider financial industry and has made it her mis- sion to force change. “In the investment industry there are lots of middle-aged white men,” Eelens says. “This is the same for many industries, as it goes back through the history of the work- force. This is not just common in finance, but in most quantitatively based fields there are more men than women.”


This is due to the value of the qualitative input, usually a strength possessed by women, being under-estimated, according to Eelens, meaning they have often shied away from the sector.


In the UK, the number of male trustees attending this year’s Pensions and Lifetime Savings Association (PLSA) investment


40 | portfolio institutional | June–July 2019 | issue 85


conference was triple the number of women in attendance, according to the del- egate list.


The PLSA itself, which has more than 1,300 pension fund members, launched the Breaking the Mirror Image campaign in spring 2017, saying that trustee boards in the UK were 83% male, with just 3% under the age of 40.


The PLSA said it wanted to rebalance this to reflect wider society and to avoid the “group think” that it believes leads to bad decisions.


The campaign kicked off a series of initia- tives and research the PLSA has been doing into rebalancing this number.


It is important, that while asset managers have a bottom line to consider, it follows that those responsible for allocating the mandates are making the same efforts towards change. While many schemes are regaining their funding level after the cri- sis, there are plenty that still have a lot of catching up to do. In the Netherlands (at least), after more than 10 years in pensions, Eelens sees a light at the end of the tunnel, with more emphasis on behavioural finance and new ways of thinking about investing. Dutch regulation has also pushed for diver- sity among decision makers and has helped introduce new ideas to pension fund boards and investment committees. The Dutch National Bank requires boards to have at least one woman, someone under 40 and a non-native – Eelens, Belgian by birth, covers all three.


“Diversity always makes decision-making better,” she says. “It is important to look at any investment decision from different points of view and that is so much easier if there are different people in the room. If there is not a diverse range of people, then the board or group has to make a conscious decision to take a different point of view and that is much harder.”


It is more likely that five people with the same background are going to have a simi- lar point of view and if everyone agrees on something before receiving additional insight, the decision it unlikely to be the best, according to Eelens.


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