Willis Towers Watson sets out action plan, calls on asset owners to hold managers accountable.
Asset managers across all branches of the investment industry are not doing enough to promote diversity, according to research by pension consultants Willis Towers Watson.
“The diversity characteristics of asset managers are a long way from being representative of broader society,” stated the ‘Diversity in the Asset Management Industry’ report. “This implies we must be missing out on talent and failing to deliver optimal cognitive diversity, which is bad for savers.”
Asset managers have been called to task for falling behind on this issue before. Earlier this year, Morningstar reported the percentage of female fund managers has stagnated at the 14% mark for the past 20 years. In 2019, the Investment Association revealed only 1% of UK fund managers are black.
Willis Towers Watson further added that asset manager “progress remains disappointing”, having conducted more than 100 culture reviews as part of their manager research processes since 2018.
Using proprietary data gathered from a study involving a cohort of around 400 products across a number of asset classes, covering diversity, benchmark-relative returns and tracking error, the firm found that “investment teams with diversity, in particular ethnic diversity, tend to generate better excess returns”.
The report called for asset owners to hold asset managers accountable, and to devote more time and attention to the issue of diversity in manager selection, as well as when building their internal teams and decision-making groups. They should look to establish clear targets that aim to significantly increase diversity in portfolios, alongside expected performance trajectory.
Asset owners wanting to take a hard line on this issue might resort to something of a Pavlovian approach – reward the good, penalise the bad – but something as simple as instigating regular dialogue with their existing asset managers about diversity and inclusion expectations is an essential starting point.
Willis Towers Watson has pledged to increase its discovery meetings with diverse asset managers by 20% “to encourage the use of a more diverse set of asset managers in its clients’ portfolios, with an expectation that these measures will improve end-saver outcomes”.
The firm has engineered an internal data-driven approach to measure diversity amongst asset managers to inform its future selection decisions. Asset managers are expected to systematically answer 25 questions related to inclusion and diversity, which is paired with more quantitative insights, such as number of women hired each year.
Willis Towers Watson then derives a baseline Diversity Score from the data, which can be used to compare asset management diversity metrics, ideally motivating changes within firms wanting to increase their scores.
One of its representative best ideas mandates, holding 76 funds, saw an improvement of diversity among key decision makers from a baseline score of 21% to 31% in one year. This was thanks to a detailed analysis of the original portfolio, with areas of weakness highlighted by the Willis Towers Watson team and a clear action plan to implement improvements.
“Improving diversity is key to building a stronger investment industry, and our initial findings show that it is positively linked to performance outcomes. We recognise that businesses are at different points in their diversity journey today, and these proposed actions are just the starting point upon which the industry can build. While we recognise the challenges that lie ahead, we strongly believe that by taking these steps, the investment industry can take a crucial leap forward in better reflecting our society and delivering better performance outcomes for savers,” said Chris Redmond, Head of Manager Research at Willis Towers Watson.