Diversity in investment management: What are the latest trends and insights?

Executive summary:

• Our 2023 Manager ESG Survey shows that transparency around DEI data is increasing among investment managers. The results reveal that equity product managers in particular are more inclined to share DEI data compared to managers in other asset classes.
• The survey also demonstrates that many managers are actively working to enhance diversity within their teams.
• At Russell Investments, we are committed to maintaining robust DEI practices to foster a more inclusive industry and to unveil and untap the often-overlooked capabilities of diverse investment talent.

When it comes to research on diversity, equity, and inclusion (DEI) in investment management, the findings are clear: underrepresentation of women and minorities signals tremendous untapped potential. Numerous studies have demonstrated that investment products steered by women or minorities – and those from diverse-owned firms – match and often surpass the performance of their majority-led counterparts.¹ Yet, as of 2021, diverse-owned firms represented just 1.4% of U.S.-based assets under management², and despite rising attention, the industry has shown frustratingly slow progress toward diverse hiring and more representative allocations.³

Making headway on diversity is, of course, a matter of equity, but it is also about recognising and harnessing a reservoir of overlooked talent and potential returns. Russell Investments has been following DEI trends for years, and we have made it an integral component of our manager research and selection process. While openness around DEI is increasing, obtaining useful data remains a challenge.⁴ One instrument in our arsenal is our annual Manager ESG Survey, which allows us to track trends and practices among asset managers. In this article, we delve into the results and explain how the data informs our investment process.

Annual ESG Survey results: Diversity-related trends and practices

The challenge of achieving diverse representation at all levels of an investment firm comes as no surprise to those in the investment industry. Transparency on this issue has risen, and most firms have stepped up their DEI efforts over the last few years. Because our manager research analysts are continually searching for the top investment talent, Russell Investments monitors these trends through our manager due diligence program. In 2016, we added a DEI sub-category to our assessment framework, and in 2020, we began tracking products that are women and/or minority led.

During the summer of 2023, we issued our 9th Annual Manager ESG survey, and as in years past, we included a set of questions designed to probe our money managers on their current levels of diversity and their approach to DEI. Russell Investments primarily uses this data to help us understand our pipeline of products and managers, but with hundreds of participants each year, the size of our survey can also be an indicator of industry trends.

One section of our survey inquires about the percentage of women and minorities on the firms’ boards, among their senior investment leaders, and as a percentage of their ownership. While this year’s pool of respondents reported a higher level of women and minorities among their owners and senior leaders, a closer look at the underlying data convinced us that those increases came from selection bias.

On the other hand, the notable jump in the percentage of firms reporting higher diversity on their boards seems to reflect a point of industry change: 32% of respondents signaled having 30% or higher female representation and 11% disclosed 30% or greater minority representation – this was up from 23% and 8% respectively last year. What’s driving that change? Boards of directors, with their structural turnover, can more quickly reflect deliberate trends toward inclusiveness, and we note that a handful of our responding managers are public companies which are subject to a rising number of regulatory and listing board diversity requirements around the world.⁵ As a result, these increases are more likely to reflect diverse recruiting and board elections but also more openness, i.e., more firms are choosing to disclose board diversity figures.

Greater transparency has emerged as a clear and beneficial trend. In the 2023 survey, the number of firms which chose not to answer or communicated that they do not disclose diversity data fell year-on-year for nearly every DEI-related question. Interestingly, our questions on board diversity generated the highest increase in response rates: only 9% of firms declined to offer insight into the proportion of women on their board while only 25% withheld their answer to same question on minorities (compared to 27% and 47% non-disclosure rates in 2022). This may reflect the public reporting requirements mentioned above, but also the reality that boards are a small and visible corporate population, making disclosure both a high and achievable priority.

Findings from our survey reveal that equity product managers are more inclined to share DEI data compared to managers in other asset classes. Further, equity managers reported a higher level of diversity as indicated by their answers relating to senior investment professionals. Among respondents, 33% of firms offering equity strategies reported >30% women or minorities in senior investor positions while only 31% of fixed income firms did so. Meanwhile, among private markets firms and real assets managers, only 28% and 26% indicated having >30% women or minorities among their senior investors. 

What actions are managers taking to support diverse talent?

Many managers are actively working to enhance diversity within their teams. Indeed, 49% responded “yes” when asked whether they have “specific policies in place which are intended to increase the level of gender or ethnic diversity among senior executives and investors”. Managers described a range of approaches, from targets and quotas (rare) to strategic talent development programs (uncommon) to diversity-oriented recruiting practices (wide adoption). Investment managers say they are motivated both by the desire to support equality and to attract and retain talent.

Russell Investments leverages an integrated investment approach to diversity

Our commitment to maintaining robust DEI practices is also driven by multiple aims. First and foremost, our imperative is to find the best investment talent globally. We recognise that a diverse team brings a wealth of perspectives, skills, and experiences that are crucial for innovative and effective decision-making. Additionally, we aim to be responsive to a rising number of clients who have expressed interest in understanding and promoting diversity levels and practices among the managers in their portfolios. Thirdly, we remain vigilant against unconscious bias in all aspects of our investment process. We track and monitor diversity in our pipeline, our buy lists, and our funds to challenge and mitigate the influence of biases that can inadvertently affect our judgments and interactions. Finally, by establishing clear protocols and regularly reviewing our outcomes, we ensure that our practices are not just well-intentioned but effectively implemented. These pillars underpin our dedication to diversity, reflecting our belief that it is not just the right thing to do but a strategic imperative for success in investing.⁶

The importance of measuring diversity

To maintain our dedication to diversity as a quantifiable aspect of our operations, we use four specific metrics to recognise diverse managers in our research pipeline and in our funds. These are defined as follows:

1. Women- or minority-led products,
2. Majority ownership by women or minorities,
3. Senior investor ratio of women or minorities greater than 40%, and/or
4. Board member ratio of women or minorities greater than 40%.

For clients with targets relating to diverse or emerging manager allocations, this information serves as a starting point for exploring a tailored opportunity set.

We maintain regular oversight of our research, recommendations, and selection processes to ensure thorough consideration and inclusion of opportunities related to diverse managers and products. Our annual review of calendar year 2022 activity revealed that we conducted a total of 222 due diligence meetings involving one or more diverse products, and as of March 31, 2023, we had identified 363 strategies amongst our Hire (4), Retain (3) and High Interest (A) ranked products, each one meeting one or more of our DEI criteria. A total of 147 unique products meeting our diversity criteria were either used by our funds or included in the portfolios of our consulting clients. This reflects our continued commitment to diversity, equity, and inclusion in our investment approach and the tangible impact it has on our portfolio composition.

Advocating for greater transparency

It’s no secret that consistent DEI data can be hard to come by. Our survey and our manager due diligence meetings help us to fill the gaps, but we remain active proponents of greater disclosure, and in 2023, we developed a new tool to allow for more dynamic queries of our diversity data. We encourage managers to use standard reporting templates and platforms such as the ILPA Diversity Questionnaire and eVestment, and we are a contributing member of the Institutional Investing Diversity Corporative (IIDC), which advocates for greater transparency of diversity data in the asset management industry. We believe that diversity information is an important input to investment decision making, and transparency is a critical first step to promoting change within the industry.

Through data collection engines including our research process and ESG survey, we aim to foster a more inclusive industry, but also to unveil and untap the often-overlooked capabilities of diverse investment talent.