Introduction
The persistent underrepresentation of diverse-managed funds is holding back the investment sector from its full potential. Diverse perspectives fuel innovation, smarter decision-making, and stronger returns—yet over 95% of capital continues to flow to non-diverse funds. This imbalance is more than inequitable; it’s a missed opportunity for creating wealth, driving market growth, and unlocking innovative strategies that benefit all investors.
National Association of Investment Companies (NAIC) recently commissioned a study that examined pension fund investments in diverse-managed funds from 2012 to 2022. The report, “Examining the Divide: Addressing Disparities in Pension Fund Commitments to Diverse-Led Funds”, uncovered critical insights that expose systemic barriers and highlight areas for reform:
- Persistent Underrepresentation: The vast majority of capital still flows to non-diverse funds, even in favorable environments, spotlighting entrenched inequities across asset classes.
- Dramatic Underinvestment: Diverse-managed funds receive smaller commitments than non-diverse funds.
- Fund Size and Growth Challenges: Diverse-managed funds need more assets than non-diverse funds to attract public pension commitments, revealing significant systemic biases.
- Institutional Differences: Public pension funds have increased their commitments to diverse-managed funds in the past decade. Corporate pensions and union pensions lag behind, with inconsistent commitments followed by a significant decrease in commitments in the last 2 years studied.
This research underscores the urgent need for reform within the pension fund ecosystem. By breaking down systemic barriers and fostering greater inclusion, the investment sector can unlock the full potential of diverse-managed funds, driving innovation, enhancing returns, and building a more dynamic financial future.
The Untapped Potential of Diversity
Diversity is a proven driver of innovation, smarter decision-making, and stronger financial returns. Yet, despite these advantages, funds led by diverse managers remain critically underrepresented. On average, diverse-managed funds receive commitments that are 25.6% smaller than non-diverse funds. The disparities are even more severe for minority women-led funds, which suffer a staggering 37.8% gap. This persistent underinvestment sidelines high-performing talent, locks out lucrative opportunities and leaves immense value untapped.
The barriers don’t end there. Diverse managers face disproportionately higher standards, requiring 123% more assets under management (AUM) than non-diverse peers to attract investments. While non-diverse funds need a median AUM of $20.2 billion, diverse-managed funds must amass $45 billion just to be considered. This systemic bias restricts access to investable capital, stifling market growth and innovation. These inequities come at a cost to all investors, who miss out on the opportunities and competitive advantages that diverse-managed funds can deliver.
Concerning Trend: Decreasing Commitments by Corporate and Union Pensions
The roadblocks faced by minority-managed funds are amplified by stark disparities in institutional decision-making. Public pension funds, often seen as leaders in promoting diversity, have gradually increased their allocations to diverse-managed funds, rising from 7.6% in 2012 to 11.1% in 2022. However, corporate pension funds lag significantly, committing $21.6 million less on average and being 45-49% less likely to invest in minority-managed funds. Union pension funds show even greater inconsistency, with commitments peaking at 9.8% in 2014 but dropping to 0% by 2022.
Figure 1: Total Percent of Diverse Investments by Pension Fund Type (2012-2022)
The research highlighted a significant decrease in minority-only managed fund commitments in the last 2 years studied, which was primarily driven by sharp declines by corporate and union pension funds. Public pension fund commitments to minority-managed funds peaked at 9.5% in 2020 and settled at 7.4% in 2022. Corporate pension funds displayed more variability, with commitments to minority-managed funds reaching 5.8% in 2020 but dropping to 0.4% in 2022. Union pension funds exhibited the highest volatility, with commitments to minority-managed funds reaching 7.4% in 2021 before plummeting to 0% in 2022.
Figure 2: Percent of Commitments to Minority Only-Managed Funds Across all Pension Types
Biases in AUM Requirements Hinder the Investment Ecosystem
These disparities are compounded by systemic biases in AUM requirements. Minority-managed funds must secure 2.23 times the assets of their non-diverse counterparts to compete for the same capital. This requirement highlights entrenched inequities in investment decision-making processes that hinder the growth of diverse-managed funds and limit their ability to scale.
The cost of these inequities goes beyond individual managers—it hinders the entire investment ecosystem. By perpetuating barriers to capital for diverse-managed funds, the industry is losing out on a wealth of ideas, strategies, and returns that diversity fosters. Breaking down these systemic biases is a critical step in unlocking untapped growth, innovation, and financial performance for all investors.
In essence, fund size factors into the disparity by serving as both a gatekeeper and a perpetuator of systemic inequities, making it harder for diverse-managed funds to compete on a level playing field.
Positive Outliers: Leaders in Commitments to Diverse-Managed Funds
Despite the daunting landscape, a few pension funds shine as positive outliers – those who emerge as clear leaders who commit to diverse-managed funds. The New York State Common Retirement Fund stands out with 62 commitments to diverse-managed funds between 2012 and 2022, nearly double the next highest performer. These top performers show a geographic concentration in states known for progressive policies (New York, California) or states with large, diverse populations (Texas, Illinois).
These exemplars prove that prioritizing diversity fuels innovation, enhances performance, and improves risk management—a model that could shape the future of finance if adopted more widely.
Top Ten Public Pension Funds Making Commitments to Diverse-Managed Funds Between 2012 and 2022
| Public Pension Fund | No. Commitments to Diverse-Managed Funds |
|---|---|
| New York State Common Retirement Fund | 62 |
| Los Angeles Fire and Police Pension System | 43 |
| Teacher Retirement System of Texas | 38 |
| Teachers Retirement System of the State of Illinois | 38 |
| Connecticut State Employees Retirement System | 36 |
| California Public Employees’ Retirement System | 34 |
| California State Teachers’ Retirement System | 32 |
| San Francisco Employees’ Retirement System | 31 |
| Connecticut Retirement Plans and Trust Funds | 29 |
| Nevada Public Employees Retirement System | 28 |
| State Teachers Retirement System of Ohio | 28 |
Among union funds, the Operating Engineers Trust Fund of Washington D.C. and Vicinity lead with 21 commitments. The strong performance of these union funds suggests that labor organizations, with their history of advocating for social equity, may be well-positioned to drive diversity in institutional investing. Notably, the top-performing union pension funds show similar numbers of commitments as the top corporate pension fund performers, suggesting that despite different structures and priorities, both types of funds have similar potential for investing in diverse-managed funds.
Top Ten Union Pension Funds Making Commitments to Diverse-Managed Funds Between 2012 and 2022
| Union Pension Fund | No. Commitments to Diverse-Managed Funds |
|---|---|
| Operating Engineers Trust Fund of Washington D.C. and Vicinity | 21 |
| U.F.C.W. Consolidated Pension Fund | 18 |
| Laborers District Council & Contractors Pension Fund of Ohio | 16 |
| New York State Nurses Association Pension Plan | 15 |
| Producer-Writers Guild of America Pension Plan | 15 |
| N. Atlantic States Carp. Guaranteed Annuity Fund | 13 |
| Central Pension Fund of the IUOE & Participating Employers | 12 |
| North Atlantic States Carpenters Pension Fund | 11 |
| UAW GM Retirees Medical Benefits Plan | 11 |
| New York State Teamsters Conference Pension & Retirement Fund | 10 |
While generally lagging public pension funds, some corporate and union pension funds show significant commitment to diverse-managed funds. The Employees’ Retirement Plan of Duke University leads corporate funds with 35 commitments, outperforming many public pension funds despite being a corporate entity. This suggests that institutional culture and priorities can play a significant role in driving diverse investments, even in the corporate sector.
Top Ten Corporate Pension Funds Making Commitments to Diverse-Managed Funds Between 2012 and 2022
| Corporate Pension Fund | No. Commitments to Diverse-Managed Funds |
|---|---|
| Employees’ Retirement Plan of Duke University | 35 |
| Eversource Retirement Plan Master Trust | 19 |
| Lockheed Martin Master Retirement Trust | 16 |
| Nationwide Retirement Plan | 15 |
| Hartford HealthCare Corporation Defined Benefit Master Trust Agreement | 13 |
| Deseret Mutual Master Retirement Plan | 12 |
| UPMC Master Trust | 12 |
| General Electric Pension Trust | 11 |
| SBC Master Pension Trust | 11 |
| UAW Ford Retirees Medical Benefits Plan | 11 |
Leadership Roles and Potential Across Fund Types
For the 10 years studied, public pension funds consistently outperformed their corporate and union counterparts in committing to diverse-managed funds. This leadership likely stems from greater public accountability, diverse stakeholders, and specific social impact mandates. While corporate and union pension funds generally lag, standout performers demonstrate significant potential for improvement. The success of leading public funds suggests that underperforming institutions could benefit from adopting similar strategies. Differences in performance across fund types may be attributed to varying governance structures, decision-making processes, and long-term strategies.
Corporate and union funds could potentially increase diverse investments by examining and adapting practices from leading public funds. Sector-specific trends, such as the strong performance of teachers’ retirement systems, indicate that factors like beneficiary demographics or institutional cultures may drive diverse fund investments. Understanding these trends could provide valuable insights for promoting diversity across all pension fund types.
Breaking the Cycle of Underinvestment
Underinvestment continues, despite numerous studies, including NAIC’s biannual “Examining the Returns” private equity study, that show diverse-owned and managed firms outperform median benchmarks. This stark disconnect between institutional investments and the performance of diverse-managed funds points to a systemic failure to harness the full potential of diverse talent. With a rapidly changing demographic landscape, addressing these disparities is essential for optimizing the sector’s efficiency, growth, and innovation.
The call for change is clear: the investment industry must evolve to create a more equitable, dynamic environment that fully leverages the power of diverse perspectives. If left unchecked, the misallocation of capital will continue to hinder growth, ultimately to the detriment of all investors. But with targeted interventions, we can build an investment landscape that promotes inclusion, maximizes returns, and uncovers untapped potential for future generations.