High performing fund managers overlooked… if they’re black

Investors are being urged to tackle institutional racism after a major study found black fund managers are often overlooked due to their colour – even when they are high performing.

The study, published last week by Stanford University and venture capital firm Illumen Capital, found evidence of racial bias in the investment decisions of asset allocators who manage money for companies, governments, universities, charities, and foundations.

The research, titled ‘Race influences professional investors’ financial judgments’, revealed that it was high performing, black fund managers who were most at risk of being harmed by racial bias.

The online experiment asked 180 primarily white asset
allocators to
rate venture capital funds based on their evaluation of a one-page summary of
the fund’s performance history.

The researchers created four
fictitious venture capital teams — two led by black male fund managers and two
by white fund managers. The funds each featured teams with a strong and weak
performance track record, the research paper said.

To test for bias, the researchers
examined asset allocators' responses to a number of criteria, including:
overall performance ratings of the team, evaluations of investment skills,
attributions of competence, attributions of social fit, expectations of how
much the fund would raise, and the likelihood of taking a meeting with the
team.

The study revealed that asset allocators favoured the
white-led, racially homogenous team even when funds led by
black fund managers possessed identical, strong credentials - but favoured
the black-led, racially diverse team when credentials were weaker.

However, despite this apparent preference for racially
diverse teams at lower performance levels, asset allocators did not express a
high likelihood of investing in these teams.

In general, asset allocators have trouble gauging the
competence of racially diverse teams and cannot distinguish between the
stronger and weaker fund management teams led by black men, the study found.

Of the $69.1 trillion global financial assets under
management across mutual funds, hedge funds, real estate, and private equity,
fewer than 1.3 per cent are managed by women and people of colour, according to
the study’s authors.

“These results suggest
first that underrepresentation of people of colour in the realm of investing is
not only a pipeline problem, and second, that funds led by people of colour
might paradoxically face the most barriers to advancement after they have
established themselves as strong performers,” the research paper said.

The researchers said asset owners
should be trained to overcome their biases by reviewing their investment
criteria and strategies, and ensuring they are knowledgeable about the success
of firms led by ethnic minorities.