Equally and increasingly important is stewardship, which traditionally refers to how investors in public companies use their influence to encourage long term value creation, but in recent years has broadened to also include engagement in favour of positive societal outcomes, such as tackling climate change.
Shareholder influence can come in a number of forms, from direct lobbying to proxy voting.
Increasingly, investors want to be reassured that when it comes to the big challenges, such as reducing carbon emissions, their asset manager is part of the solution and not part of the problem.
This is creating greater focus on asset managers and their stewardship practices.
The rise of stewardship
Stewardship is relatively new to passive investing. In active investment circles, stewardship has always sat naturally beside active stock selection as a way for portfolio managers to add value.
In the passive world, however, where the tradition is hands off, minimal cost tracking of indexes, the role of stewardship has been less obvious. But that has changed as passive investing has become a much larger part of the investment industry, and as issues around socially responsible investing have come
to the fore.
Today, the most established providers of ETFs actively engage in stewardship, and there is evidence that institutional investors increasingly look at stewardship practices when selecting which products to invest in.
For example, last year DWS commissioned a study 1 by CREATE-Research into how pension funds view stewardship.
CREATE-Research surveyed 127 pension funds in 20 different markets, asking them a range of questions around passive investing and stewardship. Among other notable conclusions, the research found that:
- The structural rise of passive investing has aroused interest in stewardship, with 60 per cent of respondents regarding it as ‘very important’ and 38 per cent as ‘important’.
- Over 84 per cent of respondents cited various stewardship practices as pivotal in improving the quality of ‘beta’ (the market return) while generating positive societal spin-offs.
- A manager’s track record on stewardship was cited as a criterion to a ‘large extent’ in manager selection by 56 per cent of respondents.
- Stewardship will become a key point of competition for index managers as competitive pressures have already driven down fees.
- 80 per cent of respondents expect stewardship demands on their index managers to increase while emphasizing the importance of direct engagement as well as proxy voting.
Although the report covered pension fund investors, the same drivers – investors demanding socially responsible investments, fee compression requiring ETF providers to seek new ways to differentiate their services, etc – are present in the high-net worth and retail investor market.
In future, investment advisers are likely to increasingly be asked to look at stewardship as a way to differentiate ETF providers.
Differentiation
