Wall Street is still an old boy’s club.
According to a new study by the Knight Foundation, a mere 1.1% of assets in the $71.4 trillion asset management industry are managed by firms owned by either minorities or women, who data suggest could make for better long-term stewards of wealth.
“Despite the potential economic and social benefits of utilizing diverse asset managers, the industry is afflicted by a lack of diversity,” read the report, the lead author of which was Josh Lerner, a professor at Harvard Business School.
The study arose after Knight attempted to diversify its endowment holdings. According to a news release, it now invests 22.5% of its holdings—$472 million—in diversely owned firms.
The results showed some range across different investment types. For mutual funds, Knight identified 127 firms owned by women, together managing $406 billion, and another 107 owned by minorities, who manage $160 billion. “The 127 firms represent 8.8% of firms and 0.9% of total industry AUM (assets under management),” the study read. “For minorities, these numbers represent 7.4% of firms and 0.3% of total industry AUM.”
For a firm to be considered diversely owned, per the study’s metrics, at least 25% of it has to be controlled by women or minorities. For the purpose of the study, minority was defined as “racial/ethnic minorities (e.g., Hispanic, Black, Asian, and Native American),” but that does not include “veterans or disabled persons.”
Hedge funds posted even more dismal levels of diversity. A mere 4.3% of hedge fund shops are owned by women, while 8.3% are minority owned by the study’s metrics. Despite that, the combined assets of the two categories control less than 1% of total hedge fund assets, which were roughly $3 trillion at the end of 2016.
Roughly 1.9% of private-equity firms are women-owned—they manage 1.5% of industry assets—while 3.7% are minority owned (3.4% of assets). For real estate, 0.7% of the 889 firms in Knight’s data set were women-owned, while 2% were minority owned. “Representation is worse when measured by AUM, with women-owned firms controlling 0.3% of total industry AUM and minority-owned firms controlling 1.5% of total industry AUM,” the report read.
Despite that, Knight noted that it would “inevitably miss a number of diverse-owned firms, particularly in real estate” because of the difficulty in identifying such shops. “This may introduce some biases, such as a bias toward larger, better-known diverse firms. While we feel confident in the data coverage of the diverse-owned PE firms, the data coverage for diverse real estate firms is lacking.”
The implications of this for investors isn’t well defined. Knight wrote that there was “statistically no difference” in the performance of diverse-owned firms and non-diverse ones, although “a separate look at the distribution of returns shows that diverse funds often have top-quartile returns, with 25% of women-owned and 28% of minority-owned funds in the top quartile, on average.”
For private equity, the report read that while it found “no evidence of differential performance on average [italics in original], there are a number of top-performing diverse-owned funds——33% of women-owned funds and 20% of minority-owned funds are top quartile. Through careful manager selection, outsized returns are possible with women- and minority owned PE firms.”
Other studies have also suggested female asset managers could be better for investors over the long term. According to Morningstar, women are 36% more likely than men to oversee passive funds, which track indexes like the S&P 500 indexSPX, +0.06% Not only are passive funds cheaper than their actively managed peers—where the components of the portfolio are individually chosen by an individual or team—but also data have shown that they get better returns over the long term.
Learn more: Why it matters that women are underrepresented among portfolio managers
Separately: Morgan Stanley wants analysts to look at gender diversity in evaluating companies
Separately, data from Terrance Odean—a professor at the University of California, Berkeley, who recently gave a presentation on investor behavior to the Securities and Exchange Commission—indicated that men trade about 45% more than women, which reduces their net returns by 2.65 percentage points a year.
“In downturns, women are more likely to hold on to their investments,” Morningstar wrote. “In rallies, women are less likely to be looking for quick wins,” the report read. “This invest-with-conviction approach may be especially beneficial for active managers, which face cost scrutiny, and have largely lagged passive funds with a conventional higher-turnover approach. It is unfortunate, then, that women have lower odds of managing active funds.”