Last night’s Oscar’s ceremony generated its fair share of memes and iconic images. From a tuxedo styled like a leather harness to a cleaned up opening monologue. A notable standout was the empowering speech by Best Actress winner Frances Mc Dormand. She called upon all of the female nominees to stand up and exhorted them to invoke the “inclusion rider” on their contracts. These riders are provisions on contracts that require the movie company or production company to employ a certain % of diverse staffers or contractors, and typically the more clout the actor/actress has the more influence they can have in ensuring one is included.
Public funds have had their own inclusion riders for years. Our own, in the state of Illinois and City of Chicago requires us to build goals into our investment policy in terms of use of diverse investment firms as well as service providers, and 40 ILCS 5/1-109 states:
It is hereby declared to be the public policy of the State of Illinois to encourage the trustees of public employee retirement systems, pension funds, and investment boards to use minority investment managers in managing their systems' assets, encompassing all asset classes, and to increase the racial, ethnic, and gender diversity of their fiduciaries, to the greatest extent feasible within the bounds of financial and fiduciary prudence, and to take affirmative steps to remove any barriers to the full participation in investment opportunities afforded by those retirement systems, pension funds, and investment boards.
The retirement system, pension fund, or investment board shall establish 3 separate goals for: (i) minority investment managers that are minority-owned businesses; (ii) minority investment managers that are women-owned businesses; and (iii) minority investment managers that are businesses owned by a person with a disability. The retirement system, pension fund, or investment board shall annually review the goals established under this Section.
If in any case a minority investment manager meets the criteria established by a board for a specific search and meets the criteria established by a consultant for that search, then that minority investment manager shall receive an invitation by the board of trustees, or an investment committee of the board of trustees, to present his or her firm for final consideration of a contract. In the case where multiple minority investment managers meet the criteria of this Section, the staff may choose the most qualified firm or firms to present to the board.
The use of a minority investment manager does not constitute a transfer of investment authority for the purposes of subsection (2) of this Section.
(10) Beginning January 1, 2016, it shall be the aspirational goal for a retirement system, pension fund, or investment board subject to this Code to use emerging investment managers for not less than 20% of the total funds under management. Furthermore, it shall be the aspirational goal that not less than 20% of investment advisors be minorities, women, and persons with disabilities as those terms are defined in the Business Enterprise for Minorities, Women, and Persons with Disabilities Act. It shall be the aspirational goal to utilize businesses owned by minorities, women, and persons with disabilities for not less than 20% of contracts awarded for "information technology services", "accounting services", "insurance brokers", "architectural and engineering services", and "legal services" as those terms are defined in the Act.
Our Fund currently targets 11-13% in fixed income, 3-5% in fixed income and 4-5% for manager allocations. In terms of target brokerage usage it targets directing 35% of commission dollars in US equity to minority brokerage firms with the relevant amounts set at 10% in non-US equity and 25% in fixed income. In practice we strongly encourage diversity at our managers by requiring them to provide vendor lists, diversity tables and describe their policy towards diversity. Diversity tables are gathered quarterly and the diversity policy at managers is discussed annually. We provide special conditions to encourage MWDBE firms to respond to RFPs, which contain a waiver of minimum requirements such as length of track record and size of assets under management. A new pension code requirement, requires our consultants to disclose the number of searches that included firms owned by a female, minority or person with a disability, together with the dollar amount that was so directed by underlying clients.
These provisions have been in place for many years, but still the number of managers used is small. In 2017 our fund awarded seven new mandates of which $93 m (or 42%) was awarded to minority/women owned firms (three out of the total). All of these firms were in the alternative area, leading to a greater fee load being directed to minority and women owned firms. As of December 31 of this year 14% of the Fund’s managers are (and 12% of the Fund’s assets are run by ) minority or women owned firms and these number will grow as commitments are drawn. We consider ourselves lucky to be working with some exceptional diverse firms, and in most cases will be increasing our allocation to those firms. But unfortunately the number of firms that we have to choose from in these areas is depressingly low – with our open-door policy we see approximately 50 managers per month at our offices. Less than 5% of these are female and minority run, and with the increasing barriers to entry in asset management as well as the challenges to the space generally we don’t expect that to change a great deal in coming years. Just last year one of our female/minority run firms based in Chicago shut down due to loss of assets and an increasingly competitive environment for its strategy – US Large Cap growth.
Until these numbers change we will be in danger of falling short of our aspirational goals as contained in the Illinois statutes. However, we will and must continue our work with our majority-run investment managers to effect change there, which can be slow in coming, but is, we believe, in progress. Regularly asking for diversity tables – asking for evidence to be written down, this sharpens the mind and exposes the shortfalls. The narrative around diversity is changing radically too – asset managers are forced to demonstrate real evidence of diversity and initiatives to promote it, not just show lip service. We are excited that the mood coursing through so many aspects of the economy is now in tune with what we, at public funds, have been trying to achieve for some time. It has, at times, been a lonely quest, when the emphasis is on returns above all. Maybe, thanks to Frances McDormand and the power of the Oscars pulpit, it won’t be so lonely in the years ahead.