Thursday, 15 January 2015

Pooled funds, voting and fiduciary duty

As some people will be aware, there is a considerable degree of frustration amongst some asset owners in the UK that they are unable to vote how they want when investing through pooled funds. There isn't any technical reason why this can't happen, some asset managers will let you do it, but, at present only a few play ball.

One of the reasons that asset owners want to vote for themselves is because they don't agree with how managers vote and/or have policies of their own. I personally think there is a strong argument for this when you look at how some of the big mainstream managers vote for the large majority of what companies put in front of them. Unfortunately, as I've blogged before, the FRC has basically sided with the asset management industry on this one.

However, it struck me that the debate around fiduciary duty may require this one to be revisited. Imagine you are a trustee of an asset owner that has a very good sense of what beneficiaries views are. For example, you are a trustee of the pension fund for a charity or NGO. You may have chosen to used pooled funds because you believe they are cheaper than a segregated mandate (might not be true actually, but anyway....). Now imagine there are is a shareholder resolution, or a management proposal for that matter, where you are certain that you know what beneficiaries' views would be, but the manager wants to vote the opposite way. If the manager won't let you over-ride their policy you are contradicting beneficiaries' views.

From my limited understanding, the Law Commission doesn't quite say that you should take beneficiaries' views into account if you are clear what they are. But I do wonder what would happen if someone actually tested this out. It does seem odd that you are forced to support something that you know those you owe a duty to are opposed to.

A standard response would be to say that if you're that bothered about voting you should go down the segregated route and avoid the problem. But arguably that means imposing a financial penalty on those that want to vote, or, if you really want to point it up, charging trustees for acting in the interests of their beneficiaries. Might be worth someone testing the ground?

P.S. This could look particularly weird where the mandate is with a passive manager. In such a case you clearly haven't appointed the manager because you believe that their analysis of companies is superior, you just want to track an index, so it isn't like their voting is part of a package. I'll come back to this one.

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