Willis Towers Watson has introduced new inclusion and diversity scores to assess progress among asset managers and sets itself targets to discover best-in-class managers.
Willis Towers Watson (WTW) has introduced a new inclusion and diversity score methodology to provide a base-level assessment of an asset manager’s diversity.
The new score is based on a recent research project during which WTW’s manager research team analysed around 400 investment products across a variety of asset classes to see how diverse the companies that offered these products were and whether diversity had an impact on their performance.
“We systematically ask asset managers a series of over 25 questions related to inclusion and diversity. We collect information both at the firm and product level, including investment team demographic information that provides insights into diversity in terms of endowed traits (e.g. gender, ethnicity) and acquired traits (e.g. work experience),” the authors of the report, Diversity in the Asset Management Industry, wrote.
“We roll this up into our new Willis Towers Watson Diversity Score to provide a base-level assessment of an asset manager’s diversity,” they said.
Although the team said they were aware of the shortcomings of quantitative metrics, they hoped to raise awareness and engage asset managers on implementing inclusion initiatives systematically, make more robust and consistent comparisons between managers and across asset classes, and track progress over time.
Previously, the firm conducted a ‘culture review’ of its high conviction asset managers as part of its manager research process. Inclusion was a part of this review, but WTW has now set up a separate scoring system that delves into the makeup of not just senior management and investment teams but also of the company owners.
A core point of the diversity score is also for clients to look at the diversity in their portfolios. You can use that to measure change and improvement
However, obtaining robust data on ownership remained a challenge, Angela Brown, Senior Investment Consultant for WTW said.
“Obviously, there are sometimes issues around getting ownership information. Some firms are reluctant in terms of providing that level of transparency,” Brown, who was part of the research project, told [i3] Insights. “Or for public companies, it is quite hard to get a detailed analysis, which is the public nature of companies.
“That is why we have been more focusing on diversity at the investment team level. But we have been looking at ownership structures as well to encourage transparency in that regard,” Brown said.
WTW will provide scores to its clients, but Brown said the firm also encouraged its clients to use the method to dissect their own portfolios.
“A core point of the diversity score is also for clients to look into their portfolios and look at the diversity in their portfolios. You can use that to measure change and improvement,” Brown said.
“We have two types of clients, delegated and advisory clients. We are going to be looking at this from a delegate portfolio management perspective as well, and trying to improve diversity in our delegated portfolios.”
Diversity & Performance
The research didn’t just look at the level of diversity, but also whether there was a correlation between diversity and performance.
The research confirmed WTW’s assumption that there was one.
“At a minimum, diversity does not hurt returns. But more than this, Willis Towers Watson’s assessment of diversity and performance outcomes shows that investment teams with diversity, in particular ethnic diversity, tend to generate better excess returns,” the authors of the report wrote.
“Our research continues as we collect more data, expand our database of manager diversity information, and engage with the investment management community to evaluate how improvements in diversity support investment outcomes,” they said.
Gaining the greatest advantage of more diversified investment teams also meant moving away from the model where there is one ‘rock star’ portfolio manager, the research found.
From our analysis, there are benefits of having a more diverse workforce and a more diverse decision making process. Obviously, when there is a star portfolio manager there is less diverse input into that decision making process.
“From our analysis, there are benefits of having a more diverse workforce and a more diverse decision making process,” Brown told [i3] Insights. “Obviously, when there is a star portfolio manager there is less diverse input into that decision making process. It is an inherent shift away from that to include more diversity.”
The firm has also set itself new targets for manager meetings in an effort to obtain a better understanding of the level of inclusion in the investment industry.
WTW’s manager research team is targeting an increase of 20 per cent in discovery meetings with firms that have a diverse investment team, where it seeks to identify best-in-class asset managers with whom it doesn’t currently work with.
Brown said this means WTW is likely to provide annual updates on any progress made in the industry.
“We have set ourselves targets around sourcing more diverse asset managers and so we will be looking at that most likely on an annual basis,” she said.
The firm also issued a warning to asset managers that do not give the issue the attention it deserves.
“Willis Towers Watson is keen to engage with asset managers who are working on improving their diversity. However, asset managers who fail to encourage greater diversity or do not respond to growing asset owner expectations, may face a downgrading of their rating – a measure which has been taken in the past by Willis Towers Watson,” the firm said.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.