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Race influences investment decisions made by investors: study

There are tens of trillions of dollars worth of financial assets being managed across mutual funds, hedge funds, private equity, and real estate. But a new study from Illumen Capital and Stanford University has found that asset allocators let racial bias influence their investment decisions, adding to racial disparities in institutional investing.

The report notes that of the roughly $70 trillion of financial assets currently under management, less than 1.3% are run by women and people of color.

“A comprehensive data set of every venture capital organization and investor since 1990 shows that the industry has remained ‘relatively homogeneous’ for the past 28 years, particularly white and male,” the study notes. “Women represent only 8% of investors. Hispanics make-up just 2% of venture capitalist investors and fewer than 1% are black.”

Lack of diversity in the industry makes it difficult for investors to tackle their bias, leading to decisions that could cause them to lose out on money.

“I’ve observed investors leaving money on the table because they underestimate the value of funds managed by people of color and women,” said Daryn Dodson, founder and managing director of Illumen Capital.

“At the top level we’d expect about $35 trillion to be allocated differently if women and people of color were representative relative to the full talent that we’d expect just by the distribution of population,” Dodson explained. “So we feel like this is a massive problem.”

But why?

While lack of diversity in the industry is partially to blame, it isn’t the only reason investors are less likely to place money in funds run by minorities or women. Dodson says that people also have an “inability to see value when race and gender are present.” It’s clear this bias needs to be addressed, as Dodson explains that reducing bias can “lead to higher returns” when it comes to investing.

The study also found that asset allocators have difficulty gauging the competence of racially diverse teams. When assessing strengths and weaknesses, investors were able to better predict future performance for white, male-led funds than funds run by women or minorities.

And paradoxically, investors exhibited more bias towards racially diverse teams with stronger performance, choosing to give greater benefit of the doubt to weaker teams.

“At stronger performance levels, asset allocators rated white-led funds more favorably than they did black-led funds when evaluating investment skills, competence, and social fit,” the report noted.

But the researchers couldn’t clearly determine why that might be the case, positing it might be down to the fact that investors hadn’t had enough experience with diverse teams.

Solving all of these problem isn’t just a matter of increasing diversity among leadership of institutional investors.

“Investing experts advising on the study believe that research, awareness-raising, professional training, and coaching as well as intentional changes to long-time industry practices, can improve the future make-up and impact of the investment community, changing the power dynamic to one that is more equitable and culturally significant,” the study noted.

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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