With the highly concentrated US markets creating the risk of greater volatility in institutional investment portfolios, it is incumbent upon the institutional allocators that select and monitor external asset managers to consider multidimensional diversity, including factors such as investment style, sector, and time horizon, in addition to demographic diversity. Broadening the dimensions of diversity in a portfolio create more ways to win and needed diversification in concentrated markets. It also reduces the likelihood that pursuing diversity could be interpreted as discriminatory.
Against this backdrop, Institutional Allocators for Diversity Equity and Inclusion (IADEI), a consortium of over 800 institutional asset allocators that seeks to drive performance through broader representation within investment portfolios and teams across the investment management industry, made five changes for the new year and beyond.
The New Take on Diversification
1. IADEI changed its name to Allocator Collective to better encapsulate the breadth of its strategy to drive performance through multidimensional diversity.
2. Allocator Collective finetuned its strategy: removing barriers to capital allocation; providing allocator access to diverse managers; and building allocator capacity. Removing barriers to capital allocation includes increasing data availability, providing resources to improve underwriting and processes to improve underwriting and monitoring. Providing allocators with access to diverse managers includes the largest open-source database of diverse-owned and diverse-led managers in partnership with its pro bono technology partner Clade and diverse manager pitch sessions by asset class. Building allocator capacity includes the Fellows and Forum program, publications and a research library available through the website, alignment of resources with like-minded organizations, and the ongoing development of allocator playbooks for building investment portfolios with more ways to win through greater diversity of thought.
3. Allocator Collective rolled out new diversity metrics in the Allocator Collective Manager Database, driven by limited partner members’ calls for greater transparency and its interpretation of the changing legal and regulatory environment. In particular, Allocator Collective has revamped the database to allow firms to report additional diversity metrics and add custom metrics. Allocator Collective no longer defines all of the dimensions of diversity, and asset managers have the opportunity to widen the range of facets of diversity that institutional allocators review and consider. This should allow institutional allocators to more precisely build diversity of thought into their investment portfolios. We aspire for our database to continue to be a source for research on the complex relationship between diversity and performance.
Firms are encouraged to provide data on race/ethnicity and gender, for both company-level economics and fund-level leadership, as institutional allocators have the option to focus their searches on managers that disclose all of this information. This badge signals a high level of transparency and commitment to diversity, enhancing the visibility and attractiveness of these firms to investors. It also makes the database more efficient to use for those institutional allocators that are primarily focused on racial/ethnic and gender diversity.
4. Allocator Collective welcomes like-minded nonprofits to contribute to and use the diverse manager database, which is free for institutional allocators and diverse managers, formally or informally. Because asset managers can report additional diversity metrics and add custom metrics as well, each one has the flexibility to disclose how it is diverse. 100 Women in Finance has been a key partner in bringing attention to the database and supporting Allocator Collective by including it in events, as has Institutional Investor.
5. Allocator Collective is increasingly focused on convening institutional allocators, most notably the Allocator Collective Fellows and Forum Program for Chief Investment Officers (CIOs) and asset class heads. The first two cohorts included participants ranging from large pensions like California Public Employees’ Retirement System (CalPERS) and Caisse de dépôt et placement du Québec (CDPQ) to large endowments and foundations like Dartmouth College and MacArthur Foundation. Milken Institute has been a key thought partner in the content for this program. If you are a CIO or asset class head of an institutional allocator who wants to deepen awareness of diversity or increase diversity in your portfolio and team , as well as build a network of like-minded peers, please find the application for the 2025-2026 Fellows and Forum Program here. Allocator Collective has other programming as well.
New Research on the Importance of Multidimensional Diversity
Academic works support Allocator Collective’s new strategy and approach. For example, recent research from Yan Lu, Narayan Y Naik, and Melvyn Teo shows that hedge fund teams with heterogeneous educational backgrounds, academic specializations, work experiences, genders, and races outperform homogeneous teams after adjusting for risk and fund characteristics. This research also suggests that diverse teams deliver superior returns by avoiding behavioral biases and minimizing downside risks. In addition, the same research cited above finds that greater diversity of gender, age, and nationality among lead partner teams of private equity funds are associated with higher deal returns and multiple expansion. The new research partnership between the UK-based cross-company initiative the Diversity Project and London Business School professor Alex Edmans on the relationship between cognitive diversity and investment team performance may yield additional practical guidance on gauging investment team potential.
How Institutional Allocators Can Get Involved
To better source diverse managers with a wider range of dimensions of diversity and underwrite equitably across a wider range of dimensions of diversity, institutional allocators may wish to access the Allocator Collective database, and read more about interesting practices for sourcing diverse talent and underwriting equitably. Allocator Collective encourages allocators, asset managers, and like-minded nonprofits to contact us with ideas and to become involved with its programs.
Note: None of this should be construed as financial or legal advice. Bhakti Mirchandani is a co-founder, along with Stephanie Westen, Sophia Tsai, and Rob Rahbari, of Allocator Collective—a pro bono effort for which no one receives any compensation.
Read the full article here
