Sponsored Article: LGPS asset owners have an interest in seeing their funds managed by diverse teams. Simon Gregory of Royal Bank of Canada argues diversity not only provides equal opportunities but also underpins world class asset management.
Any discussion of diversity in employment is both many faceted and subjective in nature. Why do we examine diversity and why is it considered important?
In the RBC Global Equity Team we would suggest that it stems from a belief in equality of opportunity within the workplace via equal access to an organisation. This leads to the possibility for progress and development, once in situ, unencumbered by any identification of difference from the pre-determined “norms”.
It is widely acknowledged that the pursuit of diversity confers great benefits upon individuals and society, however achieving meaningful diversity is proving to be much more problematic and, as such, is for discussion elsewhere.
This articles seeks to look at diversity from the perspective of the benefits it affords an organisation and, most importantly in the world of asset management, the outcomes that are delivered for clients.
Rock stars
A diverse workforce should represent the community within which it operates. Moreover, a diverse workforce brings different ideas, approaches and perspectives that strengthen the human and intellectual capital of an asset management business, ultimately to the benefit of investors.
Looking at asset management—and active management specifically—for too long this has commonly been the preserve of an individual, the (self) anointed “star” portfolio manager. This individual picks stocks based on expected future returns to create a portfolio that is anticipated to beat its benchmark.
Star portfolio managers may be using substantial amounts of internal and external research resources. However, the final decisions are largely their own. Frequently this becomes a self-fulfilling and, ultimately, hubristic cycle. Star managers take on an almost mythical aura for being able to beat the market. They are able to identify attributes and opportunities that others cannot and consequently substantial capital flows to the stars, alongside a celebrity status that is not always confined to the somewhat genteel world of asset management.
Unfortunately, we are all too familiar with the end game that frequently comes to define the star stock picker’s career: a portfolio conflagration that results in substantial losses for the star’s loyal clients. Recriminations begin and there are few winners. Active asset management suffers a further blow.
Bias
This is where diversity has a vital role to play. Every single individual on planet Earth has conscious and unconscious biases. In a star manager these will manifest themselves in the decisions they make. This can work splendidly for a time, until it doesn’t. Far better to design an investment process that seeks to eliminate or, at least, reduce as much as possible, individual human bias. We believe that this can be achieved through diversity.
Individual responsibility combined with an intellectually open system of peer review from a diverse group of colleagues should be able to counter inherent bias in any one person. In this system an individual should welcome challenge as a means of making the original thesis stronger. The broader group should enjoy the privilege of challenge because all motivations are aligned with the goal of producing the best possible outcome for the client. There is no space for parochialism or individual ego. All that matters is the integrity and ultimate performance of the overall portfolio.
In this system diversity is not only welcome, it is essential. Those with the most contrary opinions on any discussion point should be afforded the most time to put their point of view. Those who agree, more or less, with the original thesis should step back. This is seldom the case, however, as it is far easier to co-exist with a colleague who is in broad agreement rather than one who adopts a wholly different perspective.
Merit, ability and potential
A process deliberately designed to thrive on diverse views and opinions will naturally look for a broad spectrum of members. If not quite self-selecting, it should be based far more on merit, ability and potential than a traditional system that creates a team in the mirror image of its leader.
In a world where active management is under existential threat and information advantage is arbitraged away, any opportunity to increase and broaden that information advantage should be both welcomed and implemented.
Simon Gregory is global equity team product specialist at Royal Bank of Canada.
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