Diversity and Diversification: The People Edge in Portfolios
Can diverse people managing investment portfolios deliver an edge in performance? A growing body of research shows that diverse managers—defined by gender, race, ethnicity or other characteristics—perform as well as, or better than, homogenous teams. At Commonfund Forum 2022, a panel of three managers discussed the value diverse teams deliver to their investment strategies.
The managers were: Machel Allen, President and CIO, Metis Global Partners; Pooja Malik, Partner, Nipun Capital; and Arthur Young, Portfolio Manager and Managing Partner, Tensile Capital Management. The discussion was moderated by Betsy Wilson, Director, Commonfund Asset Management.
The following excerpts capture the essence of the discussion in terms of 1) the strategies each manager pursues and 2) how team diversity enhances the ability to implement their differentiated approaches.
DIVERSIFIED BY DESIGN
Wilson: We have three very different strategies represented by each of you. Tell us about them.
Malik: We focus on emerging markets equities through three strategies—market-neutral, long-only and small cap. We are a data-driven systematic manager; research across our strategies is shared and we dive deep for data in each of the 27 emerging markets in which we invest. Our philosophy is similar across all these countries but the data sets we develop, how we measure fundamentals and the indicators we use in each market are different. So, our strategy looks very different from the benchmark. From an investment philosophy perspective, our view is that in the long run prices are anchored by fundamentals; they don’t track fundamentals but they are anchored in fundamentals. In the short term, however, investment sentiment matters. We try to model long-term fundamentals and short-term sentiment. What’s really unique about our strategy is that it is designed to provide downside protection but pursue alpha through stock selection, and that makes us unique in the quant space. We manage a robust portfolio that is high Sharpe ratio and designed to outperform the market over a full business cycle while providing downside protection in off years and active stock selection in good years.
THE DIVERSITY DIVIDEND
Wilson: Let’s try to connect diverse teams to your ability to implement the strategies you just described. What do you find to be the value diversity delivers to your portfolios?
Malik: Our competitive edge comes from ideas. There’s a lot of data out there and sooner or later we all have access to the same data. That’s why for us the edge comes from ideas and ideas come from talent. Diverse talent comprises our team and there are two reasons for that. One, people hire from their networks. You hire people you know, you hire people you trust. The fact that I have a different network from most quant firms has enabled me to build a team that is high quality and not the same as everyone else’s. Two, what I have learned from my own career is that it can be hard for people to spot leaders in a company that looks different from them. That made a difference in my own career when I was up for promotion and someone on the committee said they didn’t know who I was despite the fact that I ran an $8 billion portfolio that no one wanted to touch until I turned it around in three years. People are used to defining leadership in a certain way and a lot of it has to do with visibility. Being a diverse leader, I have a different way of spotting talent. That’s a competitive edge for me.