The next big investment opportunity isn’t buried in the market, it’s hiding in plain sight. The data keeps piling up: Fund managers from diverse backgrounds are generating outstanding returns.
The latest report comes from national association of investment companies The study found that managers who were female or from diverse ethnic backgrounds had an internal rate of return of 16%, outperforming the private equity benchmark, compared with a median of 9%. This return is Get the attention of CalPERS, California’s pension plan There are $500 billion in assets to manage.
Yet most institutional investors continue to ignore the smart money and instead invest trillions of dollars through the same old closed-door networks.
At California Health Foundation, we see the strength of diverse managers in our own portfolio. Since 2016, we have invested through a diverse group of fund managers who bring fresh insights, disciplined execution and long-term vision. The results speak for themselves: solid market performance and broader impact on our mission to promote the health of California communities.
Reset risk and reward
Research from McKinsey, and BCG and Cambridge Associates Research shows that companies led by women and people of color consistently outperform their peers in preparation, strategy and execution. They invest earlier, identify overlooked opportunities, and back founders serving fast-growing, underserved markets.
With all the performance data out there, you’d think that gender- and racially diverse managers would attract large portfolios to invest in. But that didn’t happen.
A survey by the Knight Foundation shows that in 2021, only 1.4% of the $82 trillion in assets under management in the United States will be invested by diverse managers. So where is everyone?
Traditional investing tends to favor familiarity: established companies, “old boy” networks, and stagnant strategies. This narrow-mindedness can stifle innovation and ignore emerging value.
Diverse administrators outside traditional school networks bring a dimension beyond expectations—a valuable advantage that leads to higher financial returns. When investors draw on a wider range of experiences and networks, they see risks and potential more clearly. They also take advantage of stable, undervalued markets with untapped growth potential.
The real risk is not investing in a different way but investing the same way and expecting the market to outperform.
How we build better models
Our foundation manages a billion-dollar endowment with the same rigor as any institutional investor. We recognize that capital is not neutral – it shapes markets, opportunity, and ultimately well-being.
In 2018, we launched a $50 million divestment program and set out to test fund manager performance along two dimensions: racial and gender diversity in leadership and alignment with long-term community impact. Within four years, we demonstrated that they performed at least as well as our other portfolio managers, giving us the confidence to scale the model across our entire endowment.
In 2022, we made it official: Every dollar we give will reflect our mission and values. Today, 99% of our investments align with this strategy, and 92% of our assets are managed by highly diverse companies (which we define as leadership or ownership teams that have one-third or more women or people of color). Our portfolio continues to generate competitive returns while reducing the systemic risk associated with excessive concentration in the status quo investment universe.
We are not an investment company; we are a charitable organization. Taking our fiduciary duties seriously means ensuring that the funds we invest do not conflict with the funds we donate. Combining capital with mission is actually a deeper manifestation of fiduciary responsibility.
make wise choices
However, investing with diverse managers is not the exclusive purview of foundations and other mission-focused endowments. Other institutional investors are leaving money on the table. The authors of the NAIC report note an important takeaway: “Diversified and emerging manager programs are viable, high-performing investment vehicles that should be embraced by more institutional investors.” Each of the high-performing companies they highlight was an emerging manager about 15 years ago and shows clear potential.
One of our emerging managers in this strategy is a woman of color who launched her firm in 2021 and brought on a managing partner of color. The fund invests in early-stage companies that are reimagining healthcare and climate resiliency through technology, two of the fastest-changing areas in today’s economy.
Early results are promising. Its portfolio companies are delivering practical innovations: improving access to medicines for the most vulnerable, for example, and increasing available capacity for renewable energy. These innovations are rapidly scaling and attracting follow-on investment. One of the companies they invested in is expected to return six times its initial investment because it is being acquired by a larger healthcare platform.
Cal Wellness believes that purpose and performance can evolve together. When capital flows differently, everyone benefits. This is integrated into our mission. But with all this evidence, why wouldn’t all investors (not just mission-focused ones) partner with diverse managers?
The views expressed in Fortune opinion pieces are solely those of the author and do not necessarily reflect the views and beliefs of: wealth.