How Allocators Can Boost Their Woeful Diversity

Women- and diverse-led investment firms oversee just 1.4% of the assets that the $82 trillion asset management industry oversees. That bald fact should prompt asset allocators to increase their diversification, both for managers they hire and within their own ranks, argues a study from the Milken Institute think tank.

A sense of fairness isn’t the only reason that allocators should improve their diversity, equity and inclusion (DEI) profiles, the study declares. It’s in allocators’ best interest because better DEI leads to better returns, according to the study, titled, “The Path to Inclusive Capitalism: An Asset Owner Guide for Investment Portfolios.”

Enhancing DEI is an attainable objective, the report found, adding, “asset owners have the ability and responsibility to drive DEI within investment management teams and portfolios and across the asset management industry.”

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The report outlines several steps to enhance DEI among allocators. A key part is to embed a diversity mindset into the governance of pension and other institutional funds. Allocators should add DEI language to investment policy statements, collect diversity metrics and publicly report how they are doing at increasing diversity, it states. What’s more, the report says, they should institute unconscious bias training and lay out measurable goals to boost in-house support of “the challenges a marginalized minority might face.”

From there, allocators should seek to diversify their staffs. “This includes expanding searches beyond traditional talent pools,” the study says. The same goes for finding new board members. It notes with approval that the California Public Employees’ Retirement System eight years ago increased female membership of the CalPERS board to four women from one.

Plus, the study says, allocators should make a point of investing in diverse companies—and hire DEI-oriented emerging managers, even re-assessing their rules that govern how much of a track records these managers need to be hired.

The report’s authors write that they believe “real change comes from a series of sustainable, micro actions by multiple stakeholders across the asset management industry.” To allocators that aren’t taking any of the steps the study recommends to boost DEI, they urge, “This is the opportunity for you to catch up.”

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Tags: DE&I, Diversity, Milken Institute

Canadian corporate pension plans shrugged off double-digit investment losses for the year, as their aggregate funded levels topped 100% to close out 2022 thanks to surging bond yields.

According to financial service firm Aon’s Pension Risk Tracker, the aggregate funded ratio for Canadian defined benefit pension plans in the S&P/TSX Composite Index ended 2022 at 100.8%, up from 98.7% at the end of the third quarter, and 96.9% at the end of 2021. The tracker calculates the aggregate funded position on an accounting basis for companies in the S&P/TSX Composite Index with defined benefit plans. [Source]

The improvement came despite aggregate pension assets losing 15.6% over the year. That’s because the long-term Government of Canada bond yield advanced 160 basis points from the last year-end rate, and credit spreads grew by 45 basis points. The combination led to an increase in the interest rates used to value pension liabilities to 4.82% from 2.77%. Because most plans in Canada remain exposed to interest rate risk, the drop in pension liability caused by rising interest rates offset the negative effect the investment losses had on the funded status of the plans, Aon said.

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“Asset performance was poor in 2022. The poor asset performance was offset by a substantial increase in interest rates and therefore a decrease in liabilities,” Nathan LaPierre, partner at Aon Wealth Solutions, said in a statement. “Many pension plans will be starting 2023 in a very good financial position. Plans sponsors can use this favorable position to reduce risk in their asset allocations or through pension risk transfer activities.”

The funded levels have been on a tear following the market crash in March 2020 when the COVID pandemic first hit. Since March 12, when the funded levels dipped just below 80%, the aggregate funded ratio for pension plans in the S&P/TSX Composite Index has risen by more than 21 percentage points.