What Does It Take to Safeguard a Legacy in Asset Management?
Last year, the pioneering Black-owned global asset management firm Brown Capital Management found itself at a crossroads. The secret to its success had been a deliberately diverse hiring strategy, but with the looming retirement of its founder, safeguarding those practices felt urgent, especially in a business environment awakening to equity and inclusion.
One of the first Black portfolio managers, Eddie Brown, founded the eponymous firm in 1983. It was only the second Black-founded investment firm in the US. Its performance in the decades since is enviable for any investment company: By July 2021, the firm had 36 employees and $18 billion in assets. That year, its flagship small-company fund outperformed 99 percent of competitors.
“AN IMPORTANT QUESTION FOR ORGANIZATIONS IS HOW TO AVOID GROUP THINKING IN TEAMS. ”
As Brown approached retirement (and his 80s), near simultaneous dilemmas emerged: how to preserve the firm’s growth strategy and shift firm ownership while also rewarding its diverse workforce for its investment in the team’s culture, write Harvard Business School Senior Associate Dean Luis M. Viceira, Senior Lecturer Emily R. McComb, and Senior Case Researcher Sarah Mehta in the HBS case study “Brown Capital Management.”
At a time when many companies are seeking to address deep structural racism, Brown’s methods may provide an important blueprint.
“An important question for organizations is how to avoid group thinking in teams. You need to know how to modulate talent, so everyone on that team feels they are on the same level,” Viceira says. “But at the same time, if you all look alike and think alike, that’s going to lead to group thinking and mistakes. This firm is a great example of how bringing diversity in cultural background among other dimensions actually makes you better.”
An idea taking root
Despite the success of his firm, Brown had not been immune to brushes with bias. Growing up in a small segregated town in Florida after World War II, Brown recalled being awestruck by white businessmen in suits when he visited Orlando—an idea was taking root.
An anonymous donor took note of his academic potential and put Brown through college. After a break to serve in the military, Brown went to business school and ultimately started his investment career at T. Rowe Price as the company’s first Black portfolio manager. “In my years on Wall Street, I have been doubted, discounted, and judged reflexively on the basis of my skin color,” Brown wrote in The Washington Post.
The industry remains vastly white and male-dominated. Investment management companies led by people of color and women managed roughly 1 percent of $71.4 trillion of assets under management worldwide in 2017, according to a survey from the Money Management Institute.
“THERE ARE NOW MANY MORE FIRMS FOUNDED BY UNDERREPRESENTED MINORITY LEADERS, BUT THEY STILL ARE A SMALL PROPORTION OF THIS VERY BIG INDUSTRY.”
Just 2.4 percent of executive committee members—and 2 percent or fewer managing directors, portfolio managers, and analysts—were Black.
“There are now many more firms founded by underrepresented minority leaders,” Viceira says. “But they still are a small proportion of this very big industry, which represents a huge chunk of GDP in the United States and the developed world.”
Brown’s ‘special sauce’
Four-to-six-member teams manage the firm’s main investment funds, each with its own strategy. All members act as managers and analysts. They research leads, evaluate potential investment ideas, and manage investments over time.
“Brown pursues a model in which all members of the investment team are at par and make investment decisions together, instead of having someone who ultimately makes the investing calls. This is possible when teams are designed to avoid the trap of group thinking,” Viceira says.
Brown’s funds concentrate on four sectors: US small companies, US mid-sized companies, international small companies, and international equity.
Brown’s teams use revenue instead of market capitalization to define their areas of focus, and search for companies with high long-term growth potential not recognized by the market. Eddie Brown is credited with coining the popular term in investing “growth at a reasonable price,” or GARP. Research can take months before the team considers adding a holding to its portfolio, a multi-round process.
Once it buys a position, Brown Capital gives a company three to five years for its investment thesis to materialize. That’s far longer than the typical 18 months in asset management, the authors note.
Deliberate hiring strategy
Brown and Keith A. Lee, the firm’s longtime chief investment officer (who assumed the role of CEO after Brown became executive chairman earlier this year), “firmly believed that the diversity of both background and perspective among Brown Capital’s staff was a key driver behind its impressive performance,” according to the case. Indeed, the company’s recruiters approach high-potential candidates regardless of their investment background; ultimately, they’re looking for “well-rounded team players” who can provide a broader view.
Another key difference from the industry: Brown doesn’t hire newly minted MBAs. That’s because “we rely so heavily on the team dynamic,” Lee told the authors. “As a small organization, we don’t have the time to train people. We need experienced professionals with an existing track record.”
New employees relocate to Baltimore, where the firm is based. Investment teams are composed of generalists, not specialists, which maximizes knowledge sharing. The approach breaks with the common practices of treating certain workers as star performers and networking-based hiring.
Success presents a strategy dilemma
Brown Capital’s flagship fund was closed to new investors in 2013. By 2021, the year examined in the case study, it was fast approaching mid-size status. Brown executives expected that investment research company Morningstar would reclassify many of its funds as mid-size.
Shifting to a majority mid-sized fund designation might confuse the investment community that now associated Brown Capital with its winning small-company strategy. What’s more, their mid-sized company fund had weathered some rocky years—and the marketplace knew it. After a “reboot,” the fund was finally performing well, but investors often sought a longer track record before buying in, the authors note.
Employees take ownership
Brown’s “horizontal” investing approach differs from many competitors’ top-down decision-making, Viceira and McComb say. Seeking to preserve that collaborative culture, the founder long resisted being acquired by a larger firm.
Asset management companies typically are either publicly traded or are limited partnerships, in which top performers work their way up to owning a piece of the firm, the researchers say. Their management structures follow a similar pattern.
Brown decided to go another route—an Employee Stock Ownership Program (ESOP).
In 2016, Brown agreed to sell 100 percent of his ownership stake to the firm’s employees. The move helps preserve the firm’s minority-owned status. It also furthers Brown’s goal for every employee—from office staff to managers—to become “at least a millionaire,” the authors say.
“For Brown, there is clearly a factor of enduring legacy that comes with his team continuing to own the firm and keeping it as an active part of the Baltimore community,” McComb says.