Only a Data-Driven DE&I Strategy Will Impact the Investment Industry

An interview with Sam Austin, NEPC LLC Partner by Susana G Baumann, NAA External Marketing Communications Adviser

NEPC LLC is an independent and full-service investment consulting firm offering innovative, research-driven investment solutions to governments, institutions, families, and individuals. We spoke with Sam Austin, Partner and Executive Committee Member at NEPC LLC, about their outstanding results in NEPC’s DE&I latest initiatives.

NAA: Thanks for taking the time to talk to us about NEPC and its DE&I initiatives. Can you please tell us more about NECP and confirm the amount of assets under advisement and the number of employees working in your firm?

SA: The firm advises institutional as well as high net worth clients on their asset allocation, portfolio construction, manager selection, and risk in their portfolio. Presently, we are advising on 1.4 trillion, and we hire approximately 330 employees in the United States .

NAA: Thanks for confirming. Today's topic of our conversation is to share information about a very successful DE&I initiative that has taken off since you entered the firm about four years ago and surpassed expectations. Can you give us a scope of the initiative, and how do you see it changing the industry?

SA: Sure! So based on our Diverse Manager Policy 2.0 that  we articulated back in September of 2019, we committed to being transparent and accountable for both successes and shortcomings on DEI. Our 2020 report charted some milestones achieved as well as ongoing challenges that required additional focus moving forward. Our commitment was to increase the number of diverse strategies by 67% by December of 2021, increasing the percentage of strategies on our buy list managed by diverse firms from 6% to 10%. The last time I checked, which was September 30, we were somewhere around 10.5%, so we had achieved our goal early in the year.

NAA: What was your role in this progress?

SA: When I joined our firm about four and a half years ago, I felt we needed a more quantitative approach to solving a critical strategic issue. Everything else at our firm is data-driven. I wanted to make sure that we had the same discipline of setting milestones, long-term goals, short-term goals, and tactics to help us achieve those targets.

We see an inequitable gap in the number of diverse firms. Again, the number somewhere in the 17, 18, 20% range of women-owned and diverse and ethnically and racially diverse firms, number of firms but only approximately 1.3% of institutional assets being managed by those firms. We are trying to address that gap with our Diverse Manager Policy 2.0.

NAA: Does your strategy applies to all types of assets?

SA: We measure it differently in the private market space.  The numbers I've just mentioned are all publicly traded strategies because those are available at all times. If you have a drawdown private market strategy, it is only open during the window when you're raising capital. So we may have it on our buy list, but our clients can't buy it if the capital raise period is over. So we rather measure those by the number of private market strategies that we underwrite every year. Last year, we underwrote, I believe, 15 private market strategies that were diverse, managed by diverse managers.

NAA: And why do you think you surpassed the goal so early in the year? Why do you think there was so much "eagerness"?

SA: Well, that's a great question. And I don't think there's one answer other than we had a good plan, and we stuck to it. From the managers'  and NAA members' perspective, the number they care about most is the client assets that diverse managers manage. In a big portion of our business, we can't control that because we serve our clients and advise them in an advisory capacity. We're going to put a diverse manager in every search where our client allows us to do so, and we encourage them to hire this manager, but ultimately, the client makes that fiduciary decision.

In a smaller portion of our business, we manage discretionary assets in our discretionary and outsourced CIO business, where we control that manager selection decision. So we have a separate set of goals in that area, where we target a 10% increase in the amount of assets that clients have with diverse managers in our discretionary business.

NAA: What is the process to determine those diverse managers in the advisory side of your business?

SA: In the advisory business, which is the bulk of our business, first of all, we have to know who those managers are, which is solving a very thorny data problem. Secondly, we have to map the market and determine which of those managers are the ones we want to have a full six-month to 12-month due diligence process with, that can lead to a rating --they may be rated as a one, two or three on a scale of one to five. We want to be able to move them up over time to our highest rating of one. But managers can be hired by different portions of our client base with a rating of one, two or three.

All these things have to happen in sequence: you have to meet with the managers and begin a due diligence process. In 2020, we set intermediary milestones to increase the number of meetings with diverse managers by 10%. From 2019 to 2020, the plan was to grow to 132 meetings with diverse managers, and we actually met with 206. Part of this result  was due to the pandemic as we weren't having physical meetings with anybody. Because you don't have the time involved with travel, we could meet with more managers virtually. So that's one cause for how we've reached the goal of 10% strategies on our buy lists one quarter sooner than we had planned.

NAA: Even when the client makes the decision, doesn't it help them --if they are large companies, for instance, or foundations--, to also comply with their own DE&I goals?

SA: Yes, absolutely true. We share with our clients and with non-diverse managers the reasons we think are important for DE&I. We made it clear that we will be measuring even non-diverse  managers on what they are doing to improve the demography of their workforce, the safety and welcomeness of their workplace, and how they engage their communities in terms of investing in them.

We will be formalizing a project that we beta tested this summer to roll out DE&I ratings on all managers from the largest to the smallest. And, again, that's an indication that we think we have a platform by which we can help transform the industry because all those managers want to talk to consultants like us. And if we're asking the right set of questions, we expect they will get the message, and we could encourage them to place a similar priority on DE&I as does NEPC.  

So in April 2021, we issued the investment consulting industry's first comprehensive DE&I progress report, as a 45-page report on everything good, bad, and ugly of how NEPC is doing in these areas. And we're challenging all other members of the investment community to do the same. We tracked five years' worth of data by gender, racial group, ethnicity, and workforce percentage to percentage of firm ownership.

NAA: What is the message you'd like to convey to NAA's extended family?

SA: We fundamentally believe that excellence requires participation by everyone in our population. Our portfolios and our portfolio managers should look like America. And by excluding talented individuals we are having sub-optimal results. Our fiduciary responsibility is to make sure we provide the best talent available to our clients. So if you are a diverse manager with excellent investments, an exceptional investment process that is repeatable, with institutional quality, and that has demonstrated consistent performance within the amount of risk taken in the portfolio, we want to talk to you. And the way best way to do that is by emailing us at [email protected].

NAA: Thanks for your time and for sharing your knowledge today.