People of color aren’t managing foundations’ money. They should be.

Never let it be said that nothing substantive ever comes out of expense-account boondoggles like the Black Corporate Directors Conference. Every so often, a well-placed question can result in positive changes worth hundreds of millions of dollars.

Such was the case in 2010, when a conference delegate asked Knight Foundation president Alberto Ibargüen about how his foundation’s assets were invested. Specifically, the questioner wanted to know what proportion of Knight’s $2 billion had been placed with diverse firms, rather than companies owned and operated by white men.

Ibargüen didn’t know the answer, but promised that he would find out. After all, the Knight Foundation strongly believes in the value of diversity, so it ought to be practicing what it preaches.

The actual number was depressingly, yet predictably, tiny: Of all the people managing the foundation’s assets, only one was a person of color: a private-equity manager with less than $7 million of the foundation’s funds.

Happily, this was one of those problems where the solution is both obvious and pretty easy. The Knight Foundation’s endowment is managed by a man named Kevin Stephenson, who works for an outside vendor, Cambridge Associates. Ibargüen and his CFO, Juan Martinez, simply directed Stephenson to add more diverse managers to the roster. Stephenson, for his part, did what his client demanded, and today the Knight Foundation invests $472 million, or 22.5% of its holdings, with diverse-owned firms.

The fact that Knight uses an outside firm to manage its endowment was doubly helpful in this process. Not only did it make it very easy for the foundation to simply instruct Cambridge Associates what to do; it also forced Cambridge Associates to go out and spend a bunch of time looking at diverse asset managers who they might not have examined in such detail otherwise. Now that Cambridge has made itself comfortable with a larger number of such managers, it’s much more likely to choose them for other accounts. Which means that there’s an unknowable multiplier effect to Knight’s actions.

So far, so effective. A simple question leads to a simple decision which makes a significant difference.

But of course it didn’t end there. The Knight Foundation, having changed its own asset allocation, decided that the next step was to look at everybody else’s. To that end, it commissioned Josh Lerner, a professor at Harvard Business School, to produce an 85-page report analyzing “the representation of women- and minority-owned firms in the U.S. asset management industry”. The report begat a 14-page PowerPoint presentation lamenting that diverse-owned firms represent only about 1% of U.S. assets, as well as an entire campaign, which called itself DAMI, or the Diverse Asset Managers Initiative, which in turn has produced a 64-page fiduciary guide for other institutions looking to diversify their asset management.

DAMI is a bit of a peculiar fish: The Knight Foundation wanted a campaign, so they went to a campaign shop called Raben Group, which built them the campaign they wanted. The director of DAMI is Raben Group founder Robert Raben, and the two DAMI co-directors are also Raben Group principals.

Raben describes his shop as a place which is “particularly invested in people of color,” and as such he was probably a natural choice for Knight, as they searched for someone to create a campaign for them. But he’s not an investment professional, and DAMI campaign is hardly a passion project.

Partly as a result, the message is not well framed for its target audience. Raben is the kind of person who, quite rightly, gets upset about systemic racism, and so that’s the message he’s peddling here.

Raben’s story is pretty simple. Asset managers are hired by chief investment officers (CIOs), and if you ask the CIOs what they’re looking for in an asset manager, says Raben, “they say they only look at investment returns, they don’t look at anything else.” Raben has data which refutes that notion: there are lots of minority-owned asset managers who can boast returns just as good as their non-minority-owned counterparts. The problem is, he says, that there’s a lot of institutional racism in the field, which “rests on the bias that people of color can’t manage money well”.

The problem is that this narrative does a dreadful job of describing how the asset-management industry works, or explaining why it has so few minority-owned companies. The outcomes it describes are real, but Raben’s simply wrong about the factors which lead to those outcomes.

Take for example the central idea behind Raben’s report, which is that fund managers can and should be judged solely on their past returns. This is simply false: Indeed, when I asked Kevin Stephenson how much he looks at returns when picking a manager, he said that “in general, returns should be something you place very little emphasis on.”

After all, track records are not particularly useful things. Short track records suffer from randomness; long track records incorporate data from a time when the manager might have been much smaller, or hungrier, or able to move more nimbly for whatever reason. High returns can just be a function of the manager taking on more risk. And of course all track records are rife with selection bias.

What’s more, size matters: shops like Cambridge Associates simply don’t invest in firms managing less than $1 billion. If you’re investing the permanent funds of institutions with century-long time horizons, you’re not primarily chasing returns. Your first priority is rather going to be finding a safe institutional home, somewhere which has no chance of losing your money due to inexperience or fraud or weak controls. And while Raben is absolutely right that there’s no shortage of minority-owned investment funds, there is a shortage of minority-owned investment funds with more than $1 billion under management.

Partly, that’s just the law of large numbers. If you only have two or three partners, it’s relatively easy to be minority-owned; if you have a hundred partners, or if you’re a public company, it’s all but impossible.

So if you want to move the needle in terms of persuading foundations to invest more of their money with minority-owned fund managers, it’s, shall we say, unhelpful to point to non-risk-adjusted returns and complain that investment officers believe that people of color can’t manage money. There are definitely institutional constraints which prevent minority-owned fund managers from getting mandates, but they’re not that blatant, and mostly they’re associated with status quo bias and the desire to go with safe, large options.

Raben makes a good case that it’s important that minority-owned companies be welcomed into the investment community, and not just for the obvious benefits in terms of diversifying the ways that different parts of a broader portfolio are managed. “We believe that minority-owned businesses employ minorities, and they invest in our communities differently,” he says. “You don’t have a Dance Theater of Harlem, or an Ebony magazine, without black corporate assets: Minority businesses play a crucial role in strengthening our communities.”

Or, to put it another way: this isn’t just about helping rich asset managers get even richer, it’s about helping to grow the amount of wealth within communities of color. The asset management industry has changed a lot in recent years, and it’s now easier than ever to endow a relatively small shop with state-of-the-art risk management and compliance functions. So if foundations want to use active management, there’s no reason they shouldn’t pick their managers from as broad a field as possible. The Knight Foundation is helping that cause, even if their campaign can in places miss the mark.

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