Floyd’s death also draws attention to the fact that, seven years after the Black Lives Matter movement began and four years after American footballer Colin Kaepernick first took a knee during the US national anthem to protest against racial inequality and oppression, systemic racism is still rife in the US and elsewhere.

Business and society must do more to bring about racial equality — and the CLO industry is not excused from this requirement.

Financial firms can do better

In the 1980s, First Chicago sourced diverse talent from the Consortium for Graduate Study in Management (a non-profit organisation), which offered a pool of 150 top-quality entry-level MBA applicants each year. The bank committed to hiring at least 10 individuals who were African American, or from other minority backgrounds.

Levoyd Robinson, who is now a partner at CLO manager CFI Partners, was one of the beneficiaries of this scheme.

Robinson was at the top of his class in finance when he graduated. But in his first internship, at another company, he was paired with a recent graduate who held a history degree from an Ivy League university.

First Chicago took a different approach. “They paired me with a rock star,” he says. “I was the number one ranked analyst in the programme and they got the company’s top performer to mentor me on a day-to-day basis, along with the company CFO.” Looking back, Robinson says that those eight years at First Chicago were some of the best of his career. He knows though that many others have not had similarly positive starts to their careers.

The experience of Kentay Miller, a managing director and structured finance compliance officer at MJX Asset Management in New York, seems likely to be more representative of the racial discrimination and bias some black people face in structured finance firms.

“I worked for a CLO/hedge fund manager under the firm’s controller, who constantly reminded me that I was the only black person at the firm,” says Miller of his experiences in the early 2000s.

“It started with racial jokes being told in meetings in front of team members. I was expected to go along with the jokes as my non-black colleagues would remind me that ‘It’s just a joke, don’t take it personal.’ These jokes worsened over time and at some point this person asked me to share my thoughts on the notion that there is a genetic difference in intellect between white and black people.”

The small firm did not have a human resources department, so Miller tried to hide his discontent and eventually the jokes stopped. But worse was to follow. “The aggressor began downplaying my contributions to the team, removing important assignments from my portfolio and completely changing my role. My decision to eventually leave this firm was terribly difficult for me because I knew, at the time, that I was one of the few African Americans in the hedge fund or private equity space.”

Another black official working in the structured credit market, who declines to be named, says that being a member of an ethic minority can hinder your chances of being promoted.

“It’s not outright racism, it’s more about who is connected with the boss at the Christmas party and who his golf buddies might be. Because most of the senior managers in our business are white, they have a natural affinity to people with similar backgrounds.” The official thinks the problem stems from universities. “I was the only black guy in my quant class — there were Asians but no black person. The class was mostly men.”

Robinson says he was fortunate that First Chicago’s head of human resources believed firmly that a diverse workplace delivers the best results. But today, there are fewer than 10 black people working in high-profile buy-side positions across the global CLO market. Many firms hire from the same class, from the same universities, year upon year.

This needs to change, says Robinson. “The talent is out there and if you tell me that you’re not finding it, then you’re not trying hard enough.”

Action needs to start at the top

For a firm to create a diverse workforce, the focus on diversity must come from senior management. “It can’t be a special project, it has to be ingrained in the company culture,” says Robinson. He’s against the idea of hiring a diversity officer, as their work can become a box-ticking exercise. Instead, he says, if the commitment to racial equality comes from the chief executive and others at the C-suite level then it can permeate throughout an organisation.

Miller says that companies should tackle racism, racial hiring and promotion disparities by first reaching out to people of colour among their employees to get a grasp of how they feel in their work environment. This, he says, would expose a lot of difficulties that employees come up against.

Miller also believes executive teams themselves must become diverse. “It’s good for entry-level employees to see a diverse management team. It encourages employee retention and promotion from within, which makes the company more attractive to top talent,” he says. “Throughout my career, it has been important that I use my full name Kentay, not Ken or Kenny. For me, it is important that other people of colour see my name and know that I am indeed black and have worked hard to get to where I am in my industry.”

Recruitment policies must change

The next step is to improve recruitment policies. “Companies should create outreach programmes to recruit highly-skilled candidates from HBCUs [historically black colleges and universities],” says Miller. “People of colour often don’t apply because the industry lacks diversity and they aren’t confident that their experiences will be positive. Companies can also start making concerted efforts to find African American candidates for their internship programmes.”

CFI is one of the leaders in this regard. The CLO manager ensures 75% of interns are from minority groups. It has an alliance with Washington DC’s Howard University, one of the most prominent HBCUs in the US, where Robinson is on the board of visitors. Such has been the success of the partnership, he says, that the university is working with CFI to create a tailored investment management curriculum.

The recruitment partnership has drawn admiration. “We’ve had some of our peers ask us about the partnership and had institutions such as the Texas Teachers Retirement System visit the university to get a close up look at how it operates,” says Robinson.

Getting talent in the door is the first step. The second is nurturing that talent. CFI sees mentoring as imperative, and it implements many of the same practices that First Chicago championed more than 30 years ago.

Being brave enough to talk about racism in the industry is also vital, says Miller. “I often attend career days at majority-minority middle and high schools, encouraging students to work hard so they can achieve success,” he says. “However, the past few weeks have made me realise that I’ve done a disservice to them by not discussing the taboo subject of racism and the racial disparities in the financial industry. I will do this going forward.”

Since the Black Lives Matter movement has gained momentum many large corporations have expressed their support. But few have outlined steps they will take to ensure systemic racism is stamped out. “We see a lot of press releases where company heads denounce racism, but these mean nothing. What are they doing to drive change?” asks Robinson.

In contrast, the ESG (environmental, social and governance) movement is sweeping through the credit market, with swathes of asset managers signing up to the United Nations’ Principles for Responsible Investing charter, and incorporating ESG investment frameworks. But the ‘S’ of ESG encompasses many factors, including treatment of employees. This has spurred some credit firms that are committed to ESG to quiz borrowers on the make-up of their workforces to ensure there is adequate diversity and that staff are treated well.

However, asked whether asset managers can raise the topic of employee diversity when their own investment teams are lacking, Robinson responds: “That’s the definition of hypocrisy.”

Diversity improves decision making

Many asset managers are reluctant to rise above the parapet and drive change even though they know it is morally right that all companies should recruit a diverse range of people and reflect the interests of all stakeholders, including their end-investors. “I would encourage any type of asset manager to look at the communities they are living in and serving, and the everyday people putting money into their pensions,” says Robinson.

The fact that running a company according to environmental, social and governance principles is the right way to do business is surely one of the prime reasons ESG investing has taken off.

But the case for diversity in fund management is not only moral. One ESG-focused fund manager told Creditflux that diversity has particular relevance in CLO management. “This is a small and specific sector with relatively high opacity that deals with complex, high risk investments,” said an official at the firm. “Why would you not want to bring in more perspectives? The industry faces the possibility of creating group-think by having everyone from the same background. That is clearly a knowledge and decision-making risk.”

Research into asset manager performance backs this up, argues Robinson. “There is clear empirical evidence that diverse management teams outperform,” he says. One example is a 2019 study conducted by Josh Lerner (a professor at Harvard Business School), non-profit organisation the Knight Foundation and advisory firm Bella Private Markets. It found that funds managed by firms with diverse ownership (which includes women and minorities) were over-represented in the top-performing quartile of mutual funds, hedge funds and private equity.

The way forward for finance