Social equity investing is building infrastructure in communities and returning dividends to investors. (Photo by Winthrop Rockefeller Foundation)
For foundations, the path to achieving racial equity starts with a simple choice: Do you use your endowment to maintain the status quo, or do you align your investments with your mission?
When I came to Winthrop Rockefeller Foundation (WRF) in June 2007, Chief Operating and Financial Officer Andrea Dobson shared that she wanted to transform our endowment. She envisioned aligning our mission and financial investments by increasing capital access to low-wealth communities, and identifying investment firms owned and/or led by women or people of color. She also envisioned investing in venture strategies that provide capital to racially and ethnically diverse entrepreneurs, and to women.
Andrea’s vision got us thinking critically about what we could achieve through social equity investing, an impact investing strategy that helps investors match their endowment portfolios with impact goals, such as advancing access to quality education, economic mobility, affordable housing, financial inclusion, and racial and gender equity. Today—after many years of board education, debate, discussion, and changing our investment advisor to Cambridge Associates—close to 36 percent of our endowment, amounting to more than $47.1 million, is mission aligned and invested with firms led by people of color or women.
Over the years, many people have asked me why more foundations aren’t using their endowments to advance racial equity and how WRF has come so far. I tell my colleagues in the philanthropic community that our journey started with a simple choice to align mission and investments, along with discipline, courage, and collaboration between board members and investment advisors. We drew on foundation colleagues leading by example, an extensive body of literature on how to do it, and the expertise of investment managers who could help make it happen in partnership with our board.
Yet my response and the vast library of resources I share are often met with skepticism. They also reveal hidden biases. Here’s a look at two common ones and how we can leave them behind.
Bias #1: Social Equity Investing Requires Sacrificing Returns
We’ve all heard this before in the impact investing debate. But there is no strong evidence to support the assertion that social equity investing must sacrifice returns.
In fact, although WRF’s portfolio includes investments that prioritize deep impact over returns, several of the social equity investment managers in our portfolio are top-quartile performers. We are still early in building out our private social equity impact investment program, but are encouraged by initial returns in areas such as education and community development.
We are taking advantage of the opportunity to both grow our endowment and funnel more capital into underserved communities for affordable multi-family housing, increased access to quality education, and other systems that support equity. We also support local/regional community development financial institutions (CDFIs); WRF does all of its banking with Southern Bancorp and has purchased certificates of deposits with Hope Community Credit Union.
In all these activities, our team follows WRF’s Investment Policy. We are making money on our social equity investments so that we may continue our grantmaking, and we do not make special provisions for our social equity managers. If there is a firm that does not perform according to our policy, we drop them from our portfolio. We have ups and downs like all other investors, but there is money to be made in social equity investing and in expanding our portfolio.
Visionary impact investor Daryn Dodson shares why social equity investing is the future for Winthrop Rockefeller Foundation partners. (Photo by Winthrop Rockefeller Foundation)
Of course, the financial benefits of social equity investing aren’t isolated to WRF’s own experiences. Between 2013 and 2018, The Russell Family Foundation moved from 7 percent to 74 percent in mission-aligned investments, and the portfolio outperformed its blended benchmark by nearly 3 percent annualized. Investors like us have also made the business case for racial equity investing, noting that inclusive growth and investments capitalize on some of the fastest-growing demographic trends. They may also reduce long-term public costs in sectors such as health care and education, where outcomes are deeply tied to community wealth and other socially determined factors.
Bias #2: Fund Managers Led by People of Color or Women Yield Lower Returns
Here again, there is no evidence that suggests managers of color and women-led firms are less profitable than white- and male-led firms. In fact, the Knight Foundation, in partnership with Bella Research Group, updated its seminal study from May 2017 earlier this year and found that diverse-owned funds perform at a similar level to non-diverse peers. Specifically, the research investigated the distribution of performance, as well as the level at which diverse-owned firms were in the top quartile of performance. It found that diverse-owned funds perform at a similar levels to non-diverse peers across asset classes (including mutual funds, hedge funds, and private equity).
At WRF, we require that our investment advisor research firms of color and those led by women, but choosing to support those firms doesn’t mean lowering our expectation of returns. At one point, we needed to terminate an investment firm led by persons of color to follow our Investment Policy. It was painful, and we couldn’t find another firm led by persons of color immediately, but we did find other areas of our portfolio where we could increase minority representation. What we didn’t do was say, “Oh, that firm didn’t work out, so we won’t invest with any other firms led by persons of color.”
Hiring a diverse pool of quality managers is not contradictory to the goal of maximizing returns or fiduciary standards of care. Rather, it demonstrates a focus on finding the best investment management talent, as well as a commitment to advancing race and gender equity by helping to build wealth in communities of color and among women.
Leaving the Biases Behind
These biases offer insight into why so many foundations that value racial equity but neither commit to social equity investing, nor seek out managers of color and women-led firms, are stuck. Being stuck means that—on some level—these organizations want to maintain the status quo.
My colleague Alberto Ibarguen of the Knight Foundation stated in a Fast Company interview, “It’s no secret that investment management has been a white man’s club, and the homogeneity at the top levels can be self-reinforcing. People often choose folks like themselves without even thinking about it.” Decision-making about capital is often in the hands of white people, whether in funds or on foundation boards. Indeed, a 2017 BoardSource report on 111 private foundations said that 85 percent of the total number of board members at those organizations was white, and 40 percent of the foundations had all-white boards.
The status quo has failed to advanced equity and prosperity in our world. Racial bias, combined with a desire to maintain a status quo that benefits certain people over others, creates an incredibly strong opposing force against change. It keeps those in power from questioning their decisions and embracing evolution, even when evidence tells us it’s not as hard as we think and that sticking with the status quo isn’t really in the world’s best interest.
In the end, it comes down to this: Organizations either want to diversify their funds and fund managers, or they don’t. They either want to maintain the status quo, or they don’t. They either want to adapt to the evolving market, or they don’t. Those who choose to change can succeed by drawing on their commitment, discipline, and courage.
For us at WRF, using our endowment to maintain the status quo is not an option. Organizations that are feeling stuck need to ask why it is an option for them.
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Read more stories by Sherece Y. West-Scantlebury.