Diverse Investing Collective co-founder Ruth Shaber, MD spoke with May Ng, CIO of The Robert Wood Johnson Foundation about how she approaches diversity among the investment teams with whom the Foundation invests and the steps other investors can take to diversify their managers in order to drive strong performance.

RS: Why do you invest with diverse portfolio management teams?

MN: We start with performance. We have a fiduciary duty to deliver strong performance in order to fund the philanthropic work the Foundation does. We invest with diverse teams because there is a rich body of research that shows how cognitive diversity on investment teams leads to better decisions and outcomes, and an equally rich body of work that shows how gender is a source of cognitive diversity. For example, women investors tend to be more risk aware and are less susceptible to overconfidence bias. Of course, gender is not the only source of cognitive diversity, but it has been well researched and demonstrated. I believe that race and ethnicity and lived experience, among other factors, can be sources of cognitive diversity because they shape one’s world view. Homogenous teams can create groupthink and blind spots, so this is something we want to avoid as investors.

Additionally, at the Robert Wood Johnson Foundation, our investment philosophy is deeply interwoven with our mission to advance health equity and well-being for all. We believe that how we invest should reflect the same values that guide our philanthropic work. The good news is advancing equity in health and in investing can go hand in hand. There is a misconception in the investment industry that investing with diverse managers may be concessionary when this is not the case. Thirty percent of our U.S. assets are managed by portfolio managers or teams that are diverse and 34% of our assets are managed by firms with diverse leadership. We have not seen how investing with diverse teams has harmed our performance in any way, and we are working to measure the positive impact on performance over time.

RS: Many investors looking at diversity are investing primarily with diverse owned firms, but you all look deeper than the ownership level. Why?

MN: Historically asset owners have measured diversity based on firm ownership, and while investing with firms owned by diverse individuals is a worthwhile objective, I worry that focusing on ownership alone risks becoming performative. To me the most meaningful measures of diversity are:

• Representation of women and people of color amongst the portfolio management team or investment decision makers. These are the people who are responsible for performance. They are also the people that my investment team members evaluate and make judgments about.
• Representation of women and people of color in firm leadership. The CEO or managing partner is the person who sets the strategic priorities of the firm, including the importance placed on diversity, equity and inclusion in recruitment, advancement, engagement with portfolio companies and other practices.
• Representation of women and people of color amongst senior investment professionals. One way to see if there is progress is to look at the pipeline of people who are in line to become the portfolio decision makers and firm leaders in coming years. Because many investment management firms operate with an apprenticeship model, the ranks of seasoned professionals who are advancing in the firm are a leading indicator of what the firm will look like in the future.

RS: We know the vast majority of portfolio decision makers look the same. How do you,
as an asset owner, work with investment teams to increase diversity?

MN: We view our investment managers as partners and engage with them over the long-term to help them advance diversity and inclusion within their firms and in the industry. We take several steps to operationalize our efforts to engage on diversity:

• First, we use the ILPA (Institutional Limited Partner Association) diversity questionnaire for private markets and Albourne for our public markets funds to get visibility into the representation of women and people of color on investment teams. But demographic data is just demographic data. We also survey our managers to understand what practices they are implementing to advance diversity and inclusion internally, with portfolio companies and in the investment industry.
• We then package this data and send it back to our managers. They are appreciative of this information and in certain cases ask to be introduced to other managers so that they can learn from each other on this matter.
• We also collaborate with our grantmaking colleagues to provide multi-year funding to SEO (Sponsors for Educational Opportunity) to scale up their programs aimed at improving the pipeline of diverse managers.

RS: What advice would you give to other investors who want to increase diversity among their investment teams to drive improved performance and social impact?

MN: My advice is to start by truly understanding what your managers are already doing around diversity, what their specific challenges are and offering constructive support. Many managers want to have a more diverse team but may lack resources or examples. Providing tools, data, and peer best practices can go a long way in guiding them. And don’t limit your focus to diverse ownership—meaningful change comes from ensuring diversity throughout the firm or fund. Finally, understand your power as an asset owner. If we explain that we want our partners to be aligned with us on values such as diversity and ask firms to prioritize this important issue for long-term performance, they are more likely to make the effort. Inertia is powerful, but as asset owners, we have a lot of influence. Let’s use it.