Practical analysis for investment professionals
22 September 2015

Alpha Wounds: A Lack of Diversity in the Human Resources Portfolio

For the last several months, I have discussed reasons why active investment managers underperform their passive investment manager competition. Alpha wounds discussed so far include navigating toward benchmarks instead of away from them — shame on you active managers! — and the use of inappropriate measures of success – shame on you investment industry adjuncts! This month I turn to a problem hiding in plain sight: the lack of diversity in the human resources portfolio of active managers.

The Importance of Diversification

What is one of the absolute hallmarks of good investment management regardless of whether you are an active or passive manager? Diversification. How important is diversification to investment management? Let’s check in with several sources, shall we?

From Investopedia, in the article “The Importance of Diversification“:

. . . diversification is the most important component of reaching long-range financial goals while minimizing risk.

Wow! Perhaps the author of that article is being too enthusiastic. What does a less sanguine source of investment wisdom, the US Securities and Exchange Commission (SEC), say about diversification?

The Magic of Diversification. The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.

That bolded emphasis on “The Magic of Diversification” comes from a deadly serious regulator. Perhaps there is something to diversification in managing portfolios for success. So it is imperative that investment managers diversify across all of their assets if they want to have “the most important component” and “the magic.” Since the “active” in active investment management comes from human minds doing the analysis and making the investment decisions, these are clearly the most important assets at such firms. But what do we find?

Instead of human resources portfolio diversification, we find bland sameness and concentration. Chances are that the manager at an active mutual fund is a Caucasian male, educated in finance at one of a handful of elite global institutions, by a not much larger group of elite professors, and with an equally narrow point of view about how to perceive the world. In other words, at active investment management houses, their most important asset is not diversified at all. Want proof?

No Gender Diversification

My colleagues at Morningstar here in the United States publish a report each year about gender diversity in investment management. Here is a sample of what they found recently:

  • Less than 10% of all US fund managers are women.
  • Women exclusively run roughly 2% of the industry’s assets and open-end funds.

In response to the lack of gender diversity in asset management, a partner at Heidrick & Struggles, an asset management headhunter, said in the Financial Times, “It is almost indisputable that having diversity of thought within any business — particularly when you are [trading securities] or putting together a portfolio — is critical to ensuring you are aware of any biases.”

No Racial Diversification

Sadly, there is very little formal data about the number of non-Caucasians in investment management. One source, again here in the United States (sorry to my non-US readers), is the gigantic pensions manager, CalSTRS, which publishes an annual Diversity in the Management of Investments report. The manager says specifically, “Diversity in the management of investments is interwoven in the investment business goals and is consistent with the objective of investing to enhance the returns at a prudent level of risk, in accordance with CalSTRS Investment Policies . . .”

Now I must rely on an anecdote from my own career to provide a data point in the conversation. I attended a Bank of America technology conference in 2001 to hear Michael Dell give a speech. In the hotel ballroom with me were 1,013 other investment professionals. Of the 1,014 attendees, 18 were nonwhite or females. Next time you go to a conference, do your own count. I am confident that you will find a shocking lack of diversity in your audience, either by gender (see above), or race. Or, if you prefer another measure to race, what about national origin?

No Educational Diversification

Investment management firms rarely (or never) confess their susceptibility to the subjectivity of groupthink. Yet, objectively measured investment returns tell a different story. Again, we see bland sameness in results. We see a clustering around investment category benchmarks. Could it be that this is because many in the investment management business went to a limited number of elite business schools, and were educated by a small number of the same professors, who by their limited numbers are also therefore teaching a limited number of ideas?

A report by eVestment tells the story of the lack of educational diversification in the asset management industry. An indicative quote: “The following report investigates the strength of school networks within the industry, where they are most concentrated, and how networks compare to each other.” Of course, the context of the eVestment report is entirely different: They believe such concentration suggests a great place for prospective asset management pros and asset management firms to converge. The top 15 schools (and likely sources of groupthink) are:

  1. University of Pennsylvania
  2. Harvard University
  3. Columbia University
  4. University of Chicago
  5. New York University
  6. Stanford University
  7. Northwestern University
  8. University of California – Los Angeles
  9. University of California – Berkeley
  10. Boston College
  11. Cornell University
  12. Massachusetts Institute of Technology
  13. University of Michigan – Ann Arbor
  14. University of Virginia
  15. Yale University

Sample size was over 35,000 asset management employees educated at more than 900 universities. So the average number of alumni at each asset management firm should have been 39, or 0.1%, per school if there was even distribution (and I am not arguing for an even distribution). So the top five institutions described above are not responsible for 0.5% of employees in the asset management industry. Instead they are responsible for a whopping 13%. While the top 10 schools represent 19%, and the top 15 schools represent 24% of all asset management firm investment decision makers. I call this concentration, not diversification.

There are some good reasons for hiring candidates from a list of elite schools. Primarily a degree from an elite school is a form of underwriting or risk-mitigation on the part of the firm doing the hiring. Top schools presumably attract top talent that are intelligent and hard-working. Yet, there are two critical assumptions for this to be true: First, that these schools do, in fact, have outstanding recruitment policies in place on the front end, such that you need not engage in as much due diligence in your recruitment on the back end. Second, that your firm’s asset management recruitment tactics are enough. Remember the irritating detail of those underwhelming asset management returns data!

Again, from my own career, an anecdote: An older important person at the firm I used to rent my services to once told a younger important person at the firm, in an attempt at passing on words of wisdom, “Never hire anyone who went to school west of the Mississippi River.” I hold up my returns adjusted by risk over the course of my portfolio management career as evidence of the sheer folly of such a statement. However, it is indicative of a faith in the Ivy League and other elite institutions that seems unwarranted given our industry’s poor results.

Flipping the Argument on Its Head

So maybe you disagree that diversity all by itself is a panacea? No problem. Let’s flip the argument on its head then. Would you as a portfolio manager concentrate your portfolio in just one to 15 assets? Probably not, unless you knew you had a world-class analytical system in place to give you near certainty in your confidence level. Do you really trust your recruitment practices that much?


I am engaged in this discussion because I hope to foster thoughtful reflection and conversation. Here are some suggested remedies to the problems caused by a lack of diversity in human resources portfolios:

  • Invest time, energy, and mental capital in developing better recruitment practices designed to uncover quality investors — no matter their gender, race, or lack of an elite educational background.
  • People living in glass houses should not throw rocks. So let me acknowledge that the CFA program is specifically designed to mint people with competency in the same set of knowledge. The solution to this problem, if you believe it is a problem, is not to abandon institutions and the knowledge that they pass on, but to design recruitment practices that uncover unique individuals with unique ways of seeing, interpreting, and understanding the world.
  • Take a portfolio approach to your human resources portfolio. An investment in 10 utility stocks does not create diversity in a portfolio. Instead, savvy investors look to increase returns by minimizing autocorrelation, covariance, and so forth. Do the same with the people on your staff.
  • If you can only imagine recruiting from the same elite schools, then encourage them to increase the diversity of their own recruitment practices on the front end.
  • Recruit in a double-blind fashion. That is, have someone at your recruitment firm or in your human resources department redact names (gender), origin (race), and institutional names from the cover letters and resumes you review. Are you really assessing based on merits? Or are you relying on mental shortcuts to do your hiring?

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

14 thoughts on “Alpha Wounds: A Lack of Diversity in the Human Resources Portfolio”

  1. Roger Mitchell says:

    In a recent CFA Institute Magazine article, portfolio manager Julia Gorte agreed with the points made in this post. She observed that in her experience evaluating companies for aspects of diversity can add value. “Investors are always looking for superior management,” she said. “It’s logical that when companies avoid groupthink, put more options on the table, and look at them more carefully, they do a better job over the long term. What struck me is how quickly that thesis proved out in investment.” (The article, “Diversification of a Different Kind” (March/April 2015), is available here:

    1. Hi Roger,

      Love the inclusion of this story and link here. Thanks for including this for everyone to read.

      Yours, in service,


  2. Eunice Amaglo says:

    Great stuff, Jason. Very enlightening. Thanks!

    1. Hello Eunice,

      Thank you for taking the time to share your thoughts.

      Yours, in service,


  3. Spot on, Jason. The lack of diversity in asset management represents a glaring contradiction to one of the most widely held principles of investing. Thank you for so eloquently making the case.

    1. Hello Mona,

      Thank you for your kind words and your appreciation for my argument. It is an argument I have been making for almost twenty years; invented as I was exiting graduate school and competing with Ivy Leaguers in my quest for a research analyst position.

      Yours, in service,


  4. RP says:

    Thanks Jason for your super slices and serve, I really liked them.
    I am not sure if below synthesizes One aspect of performance/expectation of AM etal, but I have tried to sprinkle that here.
    Almost all tutors world-wide, share knowledge they were given and garnished by their own experiences practically gained during their own travels in life. Bias are brought into their decision making to justify their inherent ego. This surely makes critical output (par performance judged/expected) of every CPU (between ears) misaligned, as you aptly show. Deploying CPUs developed by similar handfull producers does not generate the expected outcomes. Diversification of CPUs Does, because their developers and producers are not grown utilizing the same fodder and nutrients.
    Hope above makes sense, as quick jotting down of thoughts via fat fingers on virtual keyboard are a challenge to me.

    1. Hi RP,

      Yes, I am pretty sure that I understand, and thank you for your words to describe the phenomena. A lack of diversity in thought is one of the big flaws of the investing industry, in my opinion. Most industry thought is so predictable that you could probably create research report forms based on the typical cause and effect narrative of the industry. For example, If a) stock price declines but not by too much, then b) “now is a time to add to your position,” because c) “the market is oversold.”

      I think the problem is so much more interesting than is usually admitted. Namely, our job as investors is to bring our minds as close to reality as is possible and then to be decisive with that understanding. Compare that with the usual approach: wait for news and companies that make sense given our preferred mental models, then make an almost automatic decision based on decision rules, and then finally, hope for the best.

      Yours, in service,


      1. RP says:

        Jason, Thanks and ditto.
        Best regards.

  5. Barry Schachter says:

    The author is right that diversification in the human element of portfolio management can be good for portfolio performance, but not for all the reasons he cited. I think the author is really making a different argument, arguing for ‘diversity’ in the workplace. But the author begins with portfolio diversification and its impact on portfolio performance, and argues from that.
    Diversification is good, in principle, because it can be shown mathematically to improve the performance of a portfolio (under pretty general conditions). However, the author here is claiming ‘diversity’ equals ‘diversification’ and therefore more diversity is good for portfolio performance. The author makes no serious attempt to establish a plausible link between increased diversity and improved performance. For example, relying solely on one quotation from a search firm, the author implies gender diversity = diversity of thought, which seems strange, IMO. The author argues more reasonably that diversity of thinking is a type of diversification and that should be pursued for its potential to improve performance. In that I agree with the author. There are of course many other, excellent, reasons to pursue diversity in the workplace.

    1. Hello Barry,

      Thank you for contributing to the conversation. I appreciate you taking the time to comment on the piece.

      I meant exactly what I said…investment managers manage multiple portfolios; chief among them are the securities portfolio, and the human resources portfolio responsible for making the security selection decisions. The idea of maximizing returns and minimizing risk through diversification is not just a technology deployed in investing. Simply looking throughout the natural world you also see that success is maximized through diversification. Looking at entities employing large numbers of people, from corporations, to governments, to militaries, you also see that success is dependent on diversification. In the military, there are not just bombers, but fighters, interceptors, cargo haulers, gun ships, electronics platforms, helicopters and so forth. This is a diversification of the portfolio of planes designed to handle a diversity of problems that might need addressing.

      Diversity is a noun, meaning the state of being diverse. Diversification is a verb and the act of achieving diversity. In investing we normally think of only one portfolio, the securities portfolio. So we tend to anchor toward diversification as an idea applied in a securities context. I am simply pointing out that diversity as a goal should apply in each portfolio.

      Next, there is mixed research demonstrating the benefits of gender diversification in the human resources portfolio. Some of the studies point to additional return, or minimized risks. Other researchers do not find comparable statistical significance. No study to my knowledge has shown that adding women to the male dominated world of portfolio management is a negative. Because of the mixed results I chose to include other examples of a lack of diversification in the human resources portfolio. In my piece I chose to also focus on race and education. To my knowledge no one has sought to measure the benefits to return and risk for investment managers when seeking diversification in their human resources portfolio where race, and educational background are specifically measured. However, I have experience managing portfolios of securities and people and believe there is ample evidence of the benefits of diversification within the human resources portfolio. My preferred source of diversification to focus on is the educational background of people, both formal, and informal. I would love research to be conducted in this space. I know that you have a preference for statistical methods. So I urge you to begin collecting data at the conferences you attend and within your consulting gigs. Count the number of non-white Ivy League educated males in your audience. I believe you will find a paucity of diversification. Now this is correlation strictly: negative alpha and low diversification in the HR portfolio. I am in my piece implying causation, but, as you know, causation in social sciences is difficult to prove. However, I have no problem asking my readers to make a leap of faith.

      Yours, in service,


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