ETF providers take active approach to stewardship: Morningstar

Dec 13th, 2017 | By | Category: ETF and Index News

ETF providers are taking an increasingly active approach to stewardship of the companies they hold passive stakes in, according to new research from Morningstar. The report reveals that contrary to passive investing critics, the shift to index investing has not led to an abdication of shareholder oversight.

ETF providers take active approach to stewardship Morningstar

Passive asset managers are taking an increasingly active stance on oversight of portfolio companies.

As the shift in assets from active to passive management continues, index asset managers are becoming increasingly influential, often ranking among the largest shareholders of public companies. While it might seem intuitive to assume that devoting resources to monitor investee companies is not as high a priority for passive managers as it is for active managers, managers who track indices still have a fiduciary duty to their investors to push for changes that maximise shareholder value, and, as large, permanent owners of significant proportions of listed companies, they have the clout to advance this agenda. Taking company stewardship seriously is also a chance for managers to enhance their reputations as investor advocates.

Alongside the rise in passive assets, responsible investing has gained prominence. There is a growing consensus among investors that the integration of environmental, social and governance (ESG) factors into the investment process and active ownership practices – through voting and engagement – reduces risks and leads to superior long-term performance.

The research from Morningstar included a survey of 12 of the largest ETF and index fund providers from the US, Europe and Asia. The survey results showed that while there was a wide dispersion in the level of stewardship, passive managers are increasingly committed to using the tools are their disposal – proxy voting and engagement – to improve ESG values of their holdings.

Many of the firms surveyed have both active and passive assets under management, and the results showed nearly all such firms applied the same oversight principles to companies in their portfolios regardless of management style. All but one of the companies surveyed indicated they were increasing engagement efforts, despite the associated costs, the difficult-to-quantify benefits, and the fact that potential benefits from increased oversight are shared with competitors. Given the state of fee competition in the ETF industry, this is a notable finding.

Index-tracking managers, especially in the US and Japan, state they are increasingly willing to voice concerns and challenge corporate management if necessary, especially in areas such as board composition and climate risk.

The report also notes that investor scrutiny of stewardship practices is intensifying, and while voting and engagement disclosure is improving, greater transparency will improve public understanding of passive managers’ stewardship activities.

Firms surveyed included BlackRock, Vanguard, State Street Global Advisors, Amundi, UBS, and Lyxor.

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