The latest report from the National Association of Investment Companies found that managers who are women or from racially diverse backgrounds outperformed private-equity benchmarks with a 16 percent internal rate of return, compared with 9 percent for the median. This kind of return is catching the eye of CalPERS, the California state pension plan with $500 Billion of assets to manage. 

And yet the majority of institutional investors continue to ignore the smart money, instead pouring trillions through the same old-school, closed-door networks. 

At the California Wellness Foundation, we’ve seen the strength of diverse managers in our own portfolio. Since 2016, we’ve invested through diverse fund managers who bring fresh insight, disciplined execution, and long-term vision. The results speak for themselves: steady, market-rate performance and broader impact for our mission to advance wellness for California’s communities.

Resetting Risk and Reward 

Research from McKinsey, and BCG and Cambridge Associates shows that companies led by women and people of color consistently outperform peers in preparation, strategy, and execution. They invest earlier, identify overlooked opportunities, and back founders serving fast-growing, underserved markets.

With all the performance data you would think that gender and racially diverse managers would be attracting an enormous volume of portfolios to invest. But that’s not happening.

A Knight Foundation survey shows out of $82 trillion of assets under management in the US, just 1.4% were invested with diverse managers in 2021. So where is everyone? 

Traditional investing often favors familiarity: established firms, “old boy” networks, and stagnant playbooks. Such narrowness can stifle innovation and overlook emerging value.

Diversifying managers outside of old school networks brings a dimension beyond the expected – that prized edge that delivers higher financial returns. When investors draw from wider experience and networks, they see risk and potential more clearly. They also capitalize on stable, undervalued markets that hold untapped growth potential. 

The real risk isn’t investing differently – it’s investing the same way and expecting markets to outperform.

How We Built a Better Model 

Our foundation manages a billion dollar endowment with the same rigor as any institutional investor. We recognize that capital isn’t neutral – it shapes markets, opportunity, and ultimately, wellbeing. 

In 2018, we rolled out a $50-million carve out and set out to test fund manager performance on two dimensions: the racial and gender diversity of leadership and alignment with long-term community impact. Within four years we proved they performed at least as well as the rest of our portfolio managers, giving us the confidence to scale the model across our full endowment.

In 2022 we made it official: every dollar in our endowment would reflect our mission and values. Today, 99 percent of our investments align with this strategy, and 92 percent of our assets are managed by firms that are significantly diverse (which we define as having leadership or ownership teams that are a third or more women or people of color). Our portfolio continues to yield competitive returns, while reducing exposure to systemic risk that comes from over- concentration in status-quo investment circles.

We are not an investment company; we are a charitable organization. Taking our fiduciary duty seriously means making sure the money we invest isn’t working at cross-purposes with the money we give out in grants. Aligning capital with mission is actually a deeper expression of fiduciary duty.  

Making the smart bet 

Investing with diverse managers is not the exclusive purview of foundations and other mission-focused endowments, though. Other institutional investors are leaving money on the table. The NAIC report authors point toward an important conclusion: “diverse and emerging manager programs are viable, high performing investment vehicles that should be embraced by a broader number of institutional investors.” And every outperforming firm they highlighted was an emerging manager roughly 15 years ago, showing their clear potential. 

One of our emerging managers in this strategy is a woman of color who founded her own firm in 2021 and brought in a managing partner of color. The fund invests in early-stage companies reimagining healthcare and climate resilience through technology, two of the fastest-changing sectors in today’s economy.

Early results are promising. Its portfolio companies are delivering practical innovations: improving medication access for the most vulnerable populations, and increasing the gigawatts available from renewable energy, for instance. And these innovations are scaling quickly and attracting follow-on investment. One of the companies they’ve invested in is expected to return six times its initial investment as it is being acquired by a larger healthcare platform.

Cal Wellness believes purpose and performance can thrive together. When capital flows differently, everyone benefits. That feeds into our mission. But with all this evidence, why aren’t all investors, not just mission-focused ones, working with diverse managers? 

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.