Investing in Diversity in Pension Plans

The investment profession is slowly moving away from the stereotype of “pale, male and stale” as newer and smaller money managers take advantage of opportunities. Pension plans are citing various reasons for increasing diversity among their staff, including social responsibility, better returns, appealing to more potential investment partners, and promoting an investment class that “thinks outside the box.” So far, California, Illinois, New York, Ohio, Maryland, Pennsylvania, Texas, and North Carolina have initiatives that are actively increasing diversity. 

The racial justice movement in the U.S. has pushed public pension funds to commit investments to minority controlled funds. It is these public institutions that represent a diverse swath of the U.S., making investment decisions for public servants like teachers, firefighters and municipal officials. One of the U.S.’s largest funds, California Public Employees’ Retirement System (CalPERS), is no stranger to investing in social causes. Calpers divested from South African apartheid in 1986 and quit tobacco stocks in 2000. It also does not invest in coal miners, manufacturers that make guns banned in California and businesses operating in Sudan and Iran. Despite this, CalPERS has had a hard time investing in diverse funds because of proposition 209, which bars public funds from giving preference to race, ethnicity or gender.  

To legally promote diversity, CalPERS started an “emerging manager” program in 1991, that had its budget slashed to $500 million from $3.5 billion in 2019. 

Further east from California, the $52.9 billion Teachers’ Retirement System of Illinois has been investing with minority and women-owned firms through its 15-year-old emerging manager program.  As of June 30, 95% of the $675 million preliminary total of the emerging manager program was managed by 17 minority and women-owned firms.  Illinois Teachers put out that it will be adding $250 million into the managers program, bringing the program’s portfolio up to $1 billion. The goal is to create long term relationships with these managers and then eventually “graduate” emerging managers to larger allocations within the portfolio. Illinois Teachers are considering the launch of an internship program for high school and college students, with the hopes that young people of diverse backgrounds choose to work there. 

“All of the data indicates when you have diverse boards and diverse leadership you have better returns. I would argue you’re actually violating your fiduciary responsibility by not paying attention to the data. Unless you’re only selling to white people, if I was at a firm I would want every point of view represented in the investment process,” says Sue Toigo, co-founder of the Robert Toigo Foundation and chair of Fitzgibbon Toigo & Co.  It is clear that the investment world still has progress to make, but it is comforting to note diversity initiatives are being implemented. In the end, increasing diversity will also increase profits.