Stewardship means taking care of something.
The word stewardship is also often used in the investment world to describe how large investment funds monitor and engage in the companies they invest in.
In fact, there is even a UK Stewardship Code administered by the Financial Reporting Council. This applies to investment fund managers and requires them to explain their oversight of the money they manage and how it creates long term value for their clients and benefits the wider economy.
Investment funds as shareholders, have rights and can often vote on certain proposals from the company’s board.
For example, an investment fund manager may not agree with the direction one of their companies wants to take so they may vote against it. The more shares they hold the more power they will have.
Other examples where investment managers could influence include:
- The make-up of the board.
- Executive pay.
- Risk control.
As you are probably aware, there are two types of investment funds, active funds and index/passive funds.
When it comes to active funds, it may be a bit more obvious as to why an active fund manager might want to and try to influence a company it invests in. After all, the active manager wants to get better investment returns than the market as a whole. So you can see how they may increase or decrease the shares it holds to wield power over the company.
Index tracking funds on the other hand do what they say on the tin, they track a market rather than trying to beat it.
The whole point of index tracking funds is that they don’t buy or sell shares in companies because they think one company is better than another. They have to hold companies for as long as the company is included in the underlying index it is tracking.
So does this mean index tracking funds have little motivation to want to engage and influence the companies they invest in? After all they can’t just sell out of a company if they don’t like the direction it is taking.
Vanguard are one of the biggest investment managers in the world with around $8 trillion of assets under their management.
They are well known for managing the majority of investors’ money in index tracking funds.
In a recent webinar they described themselves as “passive funds but active owners” with a stewardship team that operates in 29 countries all over the world.
They say they are motivated to engage with the underlying companies they hold because they are holding these companies for the long term. Sometimes decades and decades because as I have already said, they will invest in a company for as long as it sits in the index the fund is tracking.
Here’s a few highlights from Vanguard’s stewardship in 2021:
- 1,447 engagements with directors and other stakeholders.
- 12,937 companies where a proposal was voted on.
- $3.5 trillion equity assets under management engaged.
An example of Vanguard’s stewardship in action involves AGL Energy, one of Australia’s biggest energy suppliers.
It was found that AGL Energy were Australia’s largest corporate greenhouse gas emitters. So shareholders including Vanguard pressured the board to set new lower emission targets.
An index fund will not dump an investment if they don’t get their way, they can’t. So it’s in their interest to help develop a company over time and ensure it has the appropriate risk controls in place.
But how much power do index funds really have if the underlying company knows they won’t be sold?
Well it’s all about playing the long game.
The fact an index fund can’t sell means they are in it for the long haul. They will be back every year with their vote and can keep engaging until they see progress.
Surely it’s better to be in a position to engage even if you don’t get your way straight away than just sell up and move on? Otherwise companies will never change.
Now this isn’t an article promoting index funds over active funds. All I’m trying to explain is that worrying about a lack of engagement is not a reason not to invest in index funds.
Of course I’m sure there will be index funds out there that don’t have an appropriate stewardship process in place and may be passive owners as well as passive funds so it’s important you do your due diligence.
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Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.