Concentrated Markets and Regulatory Change
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In the face of highly concentrated markets in the U.S., institutional investment portfolios face the increased risk of volatility. As a result, it is crucial for institutional allocators to evaluate and monitor external asset managers with a focus on multidimensional diversity. This means considering not only demographic diversity but also factors like investment style, sector, and time horizon. Embracing a broader spectrum of diversity enhances opportunities for success and provides vital diversification in concentrated markets, ultimately minimizing the risk that such diversity initiatives could be seen as discriminatory.
In this context, the Institutional Allocators for Diversity Equity and Inclusion (IADEI), now rebranded as Allocator Collective, is a consortium of over 800 institutional asset allocators committed to enhancing performance through increased representation in investment portfolios and management teams across the industry. As they move into the new year, Allocator Collective has introduced five significant initiatives.
A Fresh Perspective on Diversification
1. Name Change to Allocator Collective: The organization has rebranded to better reflect its comprehensive strategy to enhance performance via multidimensional diversity.
2. Revised Strategy: Allocator Collective has refined its approach by dismantling barriers to capital allocation, improving access to diverse managers, and enhancing allocator capacity. This involves increasing data availability and resources to streamline underwriting and monitoring processes. They aim to provide allocators with access to the largest open-source database of diverse-owned and diverse-led managers, in collaboration with pro bono tech partner Clade, as well as diverse manager pitch sessions based on asset class. To build allocator capacity, they offer programs such as the Fellows and Forum, along with a dedicated research library and ongoing development of playbooks focused on incorporating diverse thought into investment portfolios.
3. New Diversity Metrics: The Allocator Collective Manager Database has introduced enhanced diversity metrics driven by the demand for increased transparency among limited partner members, reflecting the evolving legal and regulatory landscape. The revamped database allows firms to report additional diversity metrics and customize their data, permitting a broader examination of diversity elements that institutional allocators can consider when crafting their investment portfolios. The aim is to ensure that the database becomes a go-to resource for understanding the intricate relationship between diversity and performance.
Firms are encouraged to submit data on race, ethnicity, and gender, both at the company level and among fund leadership. This will empower institutional allocators to prioritize managers who disclose this information, increasing these firms’ visibility and appeal to investors focused on racial and gender diversity.
4. Collaboration with Like-Minded Organizations: Allocator Collective actively invites other nonprofits to contribute to and utilize the diverse manager database, which remains free for institutional allocators and diverse managers. Flexibility for asset managers to report additional and customized diversity metrics allows for personalized disclosure, enhancing the database’s utility. Partnerships with entities like 100 Women in Finance have helped shine a light on the database and support Allocator Collective’s objectives.
5. Focus on Connection: Allocator Collective is intensifying efforts to engage institutional allocators, particularly through the Allocator Collective Fellows and Forum Program catering to Chief Investment Officers (CIOs) and heads of asset classes. Early cohorts included representatives from notable organizations like the California Public Employees’ Retirement System (CalPERS) and the MacArthur Foundation. These initiatives focus on fostering peer connections among those seeking to enhance diversity within their teams and portfolios. Applications for the 2025-2026 Fellows and Forum Program have been made available to interested CIOs and asset class heads.
Research Supporting Multidimensional Diversity
Recent academic research reinforces Allocator Collective’s strategic shifts. A study by Yan Lu, Narayan Y Naik, and Melvyn Teo finds that hedge fund teams with varied educational backgrounds, gender, race, and professional experiences yield better performance than their homogeneous counterparts after adjusting for risk. Furthermore, the research indicates that diverse teams are adept at avoiding behavioral biases and minimizing risks. Notably, greater diversity in gender, age, and nationality among lead partners in private equity funds correlates with enhanced deal returns. Additionally, a new research initiative by the UK-based Diversity Project and Professor Alex Edmans from London Business School will explore how cognitive diversity impacts investment team performance, potentially offering further insights into this vital area.
Getting Involved as Institutional Allocators
To enhance the sourcing of diverse managers and address underwriting equitably across various diversity dimensions, institutional allocators are encouraged to utilize the Allocator Collective database. Engaging in best practices for sourcing diverse talent and equitable underwriting is an important step. Allocator Collective invites allocators, asset managers, and like-minded organizations to connect with them, share ideas, and get involved in their initiatives.
Note: This content should not be interpreted as financial or legal advice. Bhakti Mirchandani is a co-founder of Allocator Collective, a pro bono initiative where no compensation is exchanged.
