Monday, 1 June 2009

Passive managers - a bit too passive?

LAPFF has commissioned an interesting bit of research, looking at what passive (ie index-tracking) fund managers do in terms of voting engagement. Now, as passive managers don't have the option of selling out of companies where there are problems, the argument goes, voting and engagement is the only method they have to protect and enhance value on behalf of their clients.

So what do they actually do? Here are a few of the key findings -
- Managers vote proxies but do not do so consistently across the world. An estimated £130bn of assets are not regularly voted.

- Managers engage with companies to some degree but again this is not consistent across the world. It is estimated £350bn of assets are rarely, if ever, engaged.

- Resources are limited. A total of 11 individuals were identified who are responsible for the implementation of ESG policies for these £700bn of assets, held in upwards of 3000 companies across the world... investment totalling less than 4/100th of 1 basis point in Responsible Investment overall.

- Small cap stocks are rarely engaged. Managers tend to focus their engagement activities on their largest holdings.

- Holdings in emerging markets are typically never engaged. There was no evidence £15 billion of assets, held in upwards of 1000 companies, are engaged on behalf of clients, despite probable higher levels of ESG risk.

In other words, there are a lot of gaps. They don't even vote in some of the markets, and we aren't just talking small markets here. Engagement is home-biased and focuses on large caps. And across £700bn of assets there are just 11 people handling these ownership responsibilities.

This IMO is clear evidence of the ownership deficit. Fund managers just aren't set up or resourced to do the job properly, even when trading isn't their (alleged) core competence. And you can judge what impact this potentially has by looking at the share register of a typical UK company. One or two of the big passive managers are always in the top 5 investors.