Investment managers don’t understand how to rate funds managed by black people

Enlarge (credit: Govt. of Alberta / Flickr)

Science has struggled to increase the diversity of the research community, trying to ensure that everyone has an equal opportunity to contribute to humanity’s advances. But science’s struggles are nothing compared to those of the financial industry, where only about 1% of fund managers are women or minorities. While there have been some efforts made to increase diversity, finance stubbornly remains the domain of white males, even though firms run by women and minorities have, on average, produced equivalent returns.

To find out why this disparity exists, a group of Stanford researchers collaborated with a diverse financial firm to perform a relatively simple experiment. They created fake financial firms, swapped in headshots of black and white “managers,” and asked actual asset managers to rate the firm’s performance. The results showed that when performance was good, having black managers led to lower ratings than when the same performance was supposedly delivered by a white-led firm. While there were some differences when performance wasn’t as high, the likely reasons for those differences aren’t reassuring.

Assets and allocators

For everything from hedge funds to retirement investments, it’s rare to have direct ownership of stocks. Instead, investments tend to go into funds that focus on specific aspects of the market, like energy or small capitalization firms. But these funds often don’t invest in the stocks directly, either. Instead, financial specialists called “asset allocators” identify firms that have funds with the right mix of performance and targets, and these allocators invest in a number of them.

Read 9 remaining paragraphs | Comments