Institutional investors are likely to rate white-led investment teams higher than those led by black fund managers that were equal in performance, leading to racial disparities in how trillions of dollars are invested, according to research by Stanford University and private equity firm Illumen Capital.

Worse, the bias grows more pronounced at stronger performance levels when judged on investment skills, competence and “social fit,” a measure of trustworthiness, likeability and connectiveness, according to the study published in Proceedings of the National Academy of Sciences this month. The research examined differences in judgment among institutional investors when all the details of a fund’s performance and qualifications were constant except race.

“I’ve observed investors leaving money on the table because they underestimate the value of funds managed by people of color and women,” said Daryn Dodson, managing director of Illumen Capital, which he founded to address racial bias in investing. “This is true for professionals in the impact investing space too, who, seeking to improve society and achieve returns can never fully reach their goals without addressing racial bias,” he said in a statement.

The bias is reflected in stark numbers. Of the $69.1 trillion global financial assets under management, fewer than 1.3% are managed by women and people of color, the study said.

Dodson has said that Illumen, once it makes an investment, works with fund managers using coaching and bias-reduction tools to understand their implicit biases that might lead to bad decisions. The firm focuses on the areas of finance, education technology, environment and health and wellness, Dodson said in an interview published on the Social Venture Circle website.

The gender and racial makeup of the venture capital industry — where fewer than 1% of investors are black — has remained starkly uniform since 1990, the Harvard Business Review reported.

  •  In the U.K., 2% of 3,755 investment management staff were from African and Caribbean backgrounds, the Financial Times reported in June. Seven of  650 investment managers in a study were from those communities.
  • The Stanford study has been likened to research published last year by Natasha Quadlin, an assistant professor of sociology at Ohio State University, who found
    high-achieving female college graduates may face bias when applying for jobs.
  • The Stanford researchers asked 180 primarily white asset allocators to evaluate fund management teams based on short summaries of their credentials and their track record on previous investment strategies. The summaries were for four fictitious venture capital firms — two led by black managing partners and two by white managing partners — of various performance levels.
  • Karma Takeaway: By undervaluing the performance of black-led investment teams, asset allocators — whether expressing unconscious or intentional bias — may not be optimizing where they place trillions of dollars of their clients’ money.