Prioritizing Diversity Is Easier Than You Think

Diversity and sustainability have always been a part of our DNA. At Zeo, we do more than talk about diversity and ESG; we represent it. We believe this results in more inclusive perspectives and is a necessary component of our genuine commitment to sustainable credit investing. It is who we are as a firm and how we invest every single dollar on behalf of our clients. On July 28, 2020, Zeo Capital Advisors was certified as a Minority Business Enterprise (MBE) in the state of California. We made the decision to pursue this verification not just because we could (which has been true since our inception) but because the events of 2020 brought into clear focus the importance of proactive leadership and prioritization of an issue that plagues financial services with no end in sight. It doesn’t have to be this way.

We were heartened to see that a number of large institutions started programs in 2020 to survey all of their managers to assess their diversity. This is a great first step; we encourage these institutions to go one step further and hold each manager accountable. This cannot be just a check-the-box exercise, where any plausible explanation for a lack of diversity satisfies the diversity due diligence item just the same or where only a few very large diverse managers receive an overwhelming majority of token allocations.

The problem with this thinking is that asset allocation is a zero-sum game. Handing out free passes for managers is not an innocent exercise; this effort requires intentionality and a new incentive structure, which can only come from the allocators. Increased allocation to an ever-growing number of diverse managers will likely result in decreased allocations to managers who don’t share this priority. Some will view these moves as unjustified and unfair, and some of them may indeed go too far. But it’s always worth remembering that the fairness pendulum has been so far to one side for so long that, when it is finally left to swing freely, it’s unreasonable to expect it to stop right in the middle. It’s ok if it swings just a little bit in the other direction before finding the ever-elusive equilibrium of perfect inclusivity.

Meanwhile, there is no shortage of excuses for why financial services companies don’t prioritize gender and racial diversity. The most common center around difficulty finding qualified candidates or pointing to a token past hire as absolution. Boutique managers in particular already have difficulty finding the right hires who can wear multiple hats. Even Zeo, with our small team, could easily hide behind such excuses if we didn’t find them so inaccurate. In reality, when done correctly and intentionally, prioritizing an inclusive candidate pool and redefining what it means to be qualified can be expanding rather than limiting. In many ways, it is exactly the boutique managers that are in the best position to effect the change we need to see in our industry. Zeo has been proactive in our diversity efforts from day one, and we have had success with these priorities over the past 12 years. To those managers who might instinctively react with excuses and justifications, we’d like to offer a more inclusive path drawn from our experience.

First and foremost, it is essential to remember this one important truth: Just because someone hasn’t done the job doesn’t mean they can’t do the job. In a small firm like Zeo who prioritizes technology and automated processes as superior alternatives to manual processes and headcount, every role is multi-faceted and can often have responsibilities that would otherwise be compartmentalized in larger companies. As a result, we spend more time evaluating candidates by their core skillsets rather than just by their work experience. Skills are transferable if a candidate is a lifelong learner who is intellectually curious. There is some specific baseline of experience certain roles require; we’re not advocating for avoiding domain expertise. However, dismissing candidates for a role because they haven’t had that exact same role elsewhere will naturally exclude those underrepresented groups who don’t get the opportunity to fill those roles in the first place. Here is one area where boutique firms have an advantage. In our experience, smaller fund managers often prefer less-experienced candidates right out of college or business school with the intention of molding them into the perfect employee for a given role. In that case, the focus is on skillsets and mindset, which are often the only qualifying characteristics for a job.

This brings us to our second observation, which is a natural extension of the first. We have found that there is little value to a growing business in hiring people who have fully realized their potential (or believe they have). If we cannot offer a potential hire not just a job but an opportunity for personal growth, we are not doing our job as an employer. We expect employees to be self-aware enough to recognize not just their strengths but their areas for support and improvement. If a candidate is motivated mainly by monetizing their current resume without an eye toward where they can grow and learn, we find that to be a limiting and ultimately unproductive mindset. When we view our candidate pools through this lens, we find that privilege can often be a disqualifying factor. By considering skillsets and mindset, we have found that the candidate pool is naturally more inclusive without having to do much more than rethink what it means to be qualified.

Third, and for this letter, the final topic we will focus on is that of candidate sourcing. Many boutique managers will recognize traditional methods of finding candidates. These include but are not limited to networking by hiring managers or by those who will be the new hire’s future co-workers; using third-party recruiters; posting jobs with college or postgraduate career offices; and using job posting opportunities that reach a broader audience (whether industry-specific or general). All  these methods run the risk of reaching a less inclusive audience, which will naturally limit the candidate pool and result in an artificially low representation of already underrepresented groups.

Even posting jobs with industry groups, at industry-specific locations (such as Bloomberg’s JOBS board), or on general sites (such as Indeed.com) requires intentionality on the part of the hiring manager. Though these candidate sources can reach appropriate audiences, using them still requires the same redefinition of what it means to be qualified that we have just been discussing. Furthermore, expanding this effort to include groups that are demographically-focused (e.g. professional groups for women or minorities) takes little extra work but does require proactive intent, as doing so is often only natural to those firms where diversity is already present.

However, the approach to networking may be the most insidious culprit behind undermined diversity efforts, even if unintentionally so. Experienced hiring managers tend to network with more experienced candidates (i.e. those who are already doing the job). As often, they outsource networking to less-experienced members of the team. But without a deeper professional context, less experience comes with a tendency to apply a personal filter which prioritizes candidates one relates to or wants to socialize with and a professional filter that naively focuses on existing responsibilities rather than skillsets and mindset. The result is homogeneity in the workforce, which at a smaller firm is very hard to undo until there is turnover. The consequences of apathy are long-lasting.

So what are the results of intentionality at Zeo? Our team consists of 33% people of color (67% of our investment team), 50% women, and 83.5% ownership by underrepresented groups within our industry. 100% of our senior management team is staffed with underrepresented groups as well. We haven’t gotten here accidentally, and we never felt that our options were limited by our emphasis on inclusivity. The reality is quite the opposite, but it takes confidence and commitment. In short, achieving diversity in financial services is easier than many firms make it out to be. What seems to be hard is finding the will to do so.

*****

By Venk Reddy
Originally published in Q4 2020 letter


Important Disclosure Information

Zeo Capital Advisors is a fundamental investment manager with a short-duration credit mutual fund, a sustainable high yield mutual fund and separately managed accounts. Venk Reddy authored this piece and is the Chief Investment Officer and founded Zeo Capital Advisors in 2009.

For more information contact Zeo directly at 415-875-5604 or visit www.zeo.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Zeo Capital Advisors, LLC (“Zeo”)), or any non-investment related content, made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Zeo.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Zeo is neither a law firm, nor a certified public accounting firm, and no portion of the content should be construed as legal or accounting advice.  A copy of Zeo’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.zeo.com/disclosures.

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