How Daryn Dodson is Shining Light on Unconscious Bias in the Asset Management Industry – And Has the Data to Prove It

From the United States to China, South Africa, the United Kingdom and Brazil, the asset management industry is the same—98.7 percent white men.

That’s why Daryn Dodson created Illumen Capital, a private equity, venture capital and impact fund-of-funds.

Essentially, Illumen Capital invests significant amounts into funds, and works with fund managers over a 10-year period to reduce implicit biases and unlocks their ability to see underestimated and overlooked entrepreneurs, employees in their recruiting processes and board members throughout their selection processes for boards they often own and control.

After working for Calvert Funds, Dodson really thought about impact investing—which set out to create avenues for innovation around the environment and transformative environmental solutions; financial inclusion, led by funds that were transforming the frontier of financial services in an inclusive way; education technologies creating pathways to support students who learn in different ways; or health technologies enabling access to healthcare.

“I found that without an explicit strategy to really create a field within impact investing that radically included women and people of color, both the performance of the field and the positive impact the field would create would be stunted and undermined,” said Dodson.

“So, I ultimately set out to create Illumen Capital to deliver on that promise [to] create a vehicle that had market rate returns, while pushing on critical issues related to sustainability, education and healthcare.”

Dodson was also determined to figure out a way to correct one of the most important dimensions of impact that was missing from the field—the overlooked and underestimated employees, entrepreneurs and fund managers. These individuals are primarily women and people of color, specifically, Black, Latinx and Indigenous fund managers and entrepreneurs.

“We think of ourselves as a teaching hospital. Not only do we reduce the biases within our downstream funds, but we also provide a front row seat to our investors, who represent some of the largest foundations, family offices and institutions in the world,” he said.

“We allow them to see the insights that lead to reducing biases and increasing impact and returns within our portfolio, and [we] apply those insights across their entire portfolios.”

What really sets Illumen Capital apart from other impact funds is their data. Illumen Capital has a partnership with Stanford SPARQ, the behavioral science “do tank” at Stanford University, to apply rigorous and evidence-based strategies to reduce implicit bias and study the gains their funds make.

“In finance we invest in research as a field in so many things that address latent value in markets. However, in this area very little had been invested in research to uncover this massive opportunity behind racial bias. In fact, most investment banks have an entire division devoted to researching thousands of areas where they can make money but not in [the] area of racial and gender bias,” said Dodson, calling out the dearth of high-quality research on racial bias in financial markets with regards to the best tools for measurement and other aspects investors need to address across global markets.

For the past 40 years, people cited that Black fund managers performed at parity or above their white counterparts. Yet there was little additional capital going into these high performing managers. Illumen Capital’s work with SPARQ really homed in on the question: Why was it that against all the inclinations of the profit motives of Wall Street and other types of firms, throughout the world they were missing these high performing Black managers?

Working with SPARQ, Dodson and his team conducted an experiment, secretly testing 180 asset allocators globally, and found that the higher Black fund managers perform, the more bias they face, thus the more money investors left on the table when the fund manager was Black.

“This research is part of the thesis that we’re testing with Illumen Capital right now, and [it is] the cornerstone on which we built the firm. If we could identify these outperforming managers, and enable funds we invest into to see outperforming companies, we have a competitive, market-driven, alpha generating strategy. Finally, if we can help our investors do the same, we can begin to generate a massive industry-wide shift of capital,” he said.

Collectively, Illumen Capital’s investors manage more than $4 trillion in capital, so the power to apply, and the ability to see overlooked and underestimated fund managers and entrepreneurs within their broader portfolios is significant.

“What we found is that it’s actually a bias that introduces itself when asset allocators are going about their due diligence that prevents them from seeing across race and across gender, the actual returns present,” said Dodson.

Working with other funds to acknowledge and correct this bias is vital to Dodson’s work. Comparing implicit bias to a used car “you can get a lemon, or you can get a top-grade, high-performance vehicle,” Dodson cited one of the key problems with any implicit bias reduction curriculum is that not all curriculum is created equally.

The change must come from the top, a lesson Dodson learned by previously working with funds in a more consulting-focused role.

“What I found was that it was difficult to get any real traction without coming from a place of true authority, or power, because as a consultant, you can be hired or fired by the institution you work for. Sometimes the better your recommendations, the more likely you were to disappear,” he said.

With Illumen Capital, Dodson now has the power to truly make an impact.

“The true partnership model we have built at Illumen Capital is much more effective,” he continued.

“We invest significant amounts, partner together with our managers, have a legal understanding of what’s expected on both sides and work together to reduce these biases in order to unlock impact and returns across our field.”

In addition to what he saw in the asset management space firsthand, Dodson was inspired by his grandmother to further Black and minority voices in the field. Growing up in Washington, D.C., Dodson reflected on her role in the public school system, working to implement desegregation within the schools. As part of her role, along with many education professionals, she received a pension which was almost certainly managed 100 percent by white men.

“When we reflect on that reality, and the fact that she may not have even known that, as teachers across the country rarely meet the investment managers that they depend on for their retirement, I think she would be pretty upset for two reasons,” he said.

“The first is because, based on what we know by modern portfolio theory, the portfolio would likely underperform. If you leave out certain high performing managers, because they’re high performing and because they’re Black, then the portfolio would likely underperform. The second reason she would be upset is that people that were part of the communities that she worked so hard to integrate Black people like her, that had incredible talent and ability were not given the opportunity to invest [their] assets to achieve the highest returns—all because [of the color of their skin].”

That dual impact of her frustration with a country that she served in such a powerful and important way, and the fact that the young people she taught that would serve in leadership roles—and even her grandchildren, like Dodson himself, haven’t seen a change. Asset management business remains at 1.4 percent of $69 trillion in assets under management by women and people of color. Daryn suspects it would make her doubly angry.

In his overall mission to amplify Black voices in the asset management space, as a Black entrepreneur, Daryn also faced challenges.

“One of the challenges that I faced as a Black entrepreneur is realizing that the same principles I learned at Stanford Business School surrounding economic optimality, modern portfolio theory and the fundamentals of the investment market, don’t apply to me,” he said.

Fundamentals like how people invest in risk adjusted returns, and seek alpha in markets, the heart of all investing is to find areas of latent value and marketplaces and buying low and selling high. When we examine investing in Black asset allocators or Black asset managers or entrepreneurs, what we see, and a major point that has been indicated through Illumen Capital’s research, is the higher you perform, the more bias you face—and Dodson quickly learned he was no exception.

That’s why he recommends other Black entrepreneurs do their research.

“What I’m always afraid of is that these incredibly high performing, brilliant Black entrepreneurs will internalize what the asset allocators are giving them in terms of decisions as some kind of fault of their own, when in reality, it’s the asset allocators who are missing tremendous value,” he said.

That goes back to why Illumen Capital exists—to challenge asset allocators to do the work on their side, and to really hold them accountable to reducing their biases to hone in on this underestimated and overlooked talent.

“Definitely keep an eye out as we continue to push the edges of research in our partnership with Stanford SPARQ, as we’re working on some new initiatives with the research center,” said Dodson.

In the next few weeks, Illumen Capital will host an Impact Experience—an experience created to allow investors to come together and find key solutions that may create a more equitable and optimal investment ecosystem—in Montgomery, Ala. Illumen Capital is bringing investors to examine the through-line between slavery, lynching and mass incarceration, and the way these periods in history have influenced the imbalance in the asset management industry.

Hopefully, both investor and teacher can work together for a more equitable future.