Pension funds raise concern over index manager stewardship
Retirement schemes call on passive groups to engage with companies directly
Passive fund managers are failing to fulfil their stewardship duties, according to their pension scheme clients, partly because of the sheer number of companies in the indices their products track.
Providers of products such as index cap-weighted funds and exchange traded funds have scooped up trillions of dollars in retirement assets over the past decade as investors embraced cheaper alternatives to expensively managed active funds.
But many index fund managers are not doing enough to monitor how investee companies are being run and push them to make changes, according to a study by consultancy Create-Research.
More than a quarter (27 per cent) of the 127 pension plans with €2.2tn in assets surveyed said index managers were not meeting their stewardship goals at all, while 23 per cent said they were only meeting them to a limited extent.
“To them, passive funds should not mean passive owners,” said Amin Rajan, chief executive of Create-Research and author of the report.
Passively managed funds make up a growing proportion of pension fund assets, the survey found, accounting for 34 per cent, up from 32 per cent last year. The majority of pension funds expect this to rise.
But they said the sheer number of companies in indices tracked by passive products was a block to better engagement, with 60 per cent citing the tens of thousands of investee companies as a reason.
The Big Three in passive investment — BlackRock, Vanguard and State Street, which collectively oversee more than $14tn — have grown their stewardship teams, which oversee their voting and engagement, in recent years. But they remain relatively small.
BlackRock has 43 people working in stewardship, Vanguard has 35 and SSGA has a dozen.
“We’re increasing our corporate activities year after year,” said Simon Klein, head of passive sales for Europe and Asia at DWS, which sponsored the report.
The German asset manager’s stewardship team is half a dozen strong but it said portfolio managers also engaged in corporate governance activities.
The scale of the task means many asset managers use proxy voting advisers to help them monitor companies. But pension funds also said they were concerned about this reliance.
However, 64 per cent of pension fund respondents said the third parties were too powerful. The proxy advice industry, which is dominated by Institutional Shareholder Services and Glass Lewis, is coming under greater regulatory scrutiny.
“Navigating these areas requires year-round conversations instead of just annual general meetings . . . it costs time and money,” said Mr Rajan, who suggested this could raise fees. “It’s a tall order for any organisation. Proxy voting has a very important role to play.”
At a time of fierce competition between passive managers, he predicts the quality of stewardship will become a way for them to stand out.
More than half of the pension funds surveyed said they used a managers’ records on stewardship to a “large extent” in manager selection.
Pension funds said they wanted a clearer picture of how their fund managers had engaged with companies with regular stewardship reports as well as voting policies and records displayed on managers’ websites.
More than 80 per cent said they wanted passive fund managers to “act like an active owner” and engage with companies directly.