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Passive investors 'not abdicating stewardship responsibilities' [updated]

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Passive investing does not lead to an abdication of stewardship responsibilities, investment research firm Morningstar has said.

On the contrary, index managers such as BlackRock, Vanguard, and State Street Global Advisors (SSGA) were increasingly taking an active role in the oversight of investee companies, it said.

The firm surveyed 12 providers of index funds and exchange-trade funds (ETFs) with over $12trn (€10.2trn) of assets under management in total.

It found that nearly all of the providers applied the same stewardship principles to all their holdings, irrespective of whether these were in passive or active portfolios.

Geode Capital Management – which runs index-tracking funds on behalf of Fidelity – has historically backed management with its votes more than the other surveyed asset managers, although there were signs that the firm was becoming more willing to challenge the status quo, according to Morningstar.

This year BlackRock and Vanguard supported a high profile shareholder resolution at Exxon Mobil against the board’s recommendation. This year was the first that Vanguard had supported a climate-risk disclosure resolution.

The growth in index investing has coincided with …

Rise of passive

Morningstar’s survey work also found an increased commitment to engagement among index managers.

“The research shows that index managers have no intention to free-ride with respect to engagement,” the research firm said. “Many are intensifying their efforts in that area.

“They also, and perhaps more importantly, intend to improve the quality of their interactions.”

Index managers’ corporate governance teams have grown recently, Morningstar highlighted. BlackRock’s expanded from 20 members in 2014 to 33 today, while UBS was to have 11 dedicated professionals employed by the end of this year, up from four in 2015.

… increasing interest in responsible investment 

Growth in PRI signatories

Hortense Bioy, director of passive strategies research for Europe at Morningstar, said: “Our research shows the largest index managers have stepped up their efforts in the areas of voting and engagement, as they seek to influence investee companies and help improve ESG standards across the board.

“However, practices vary significantly among index managers and firms need to be doing more to enhance disclosure and communication to improve public awareness and understanding of their activities.”

The costs associated with voting and engagement activities may lead to more differentiation among the managers’ approaches, Morningstar suggested.

Large asset managers with economies of scale should be able to absorb the additional costs, but this may be more difficult for smaller firms. These would have little choice but to either do the minimum required or outsource stewardship activities.

The benefits of direct engagement seemed more evident for managers that also had an internal active stock-selection business, and less so for the surveyed managers whose mandates were limited to passive and/or quantitative active strategies, such as Schwab and Geode.

Note: A previous version of this article stated that Geode Capital Management ran funds on behalf of Fidelity, Vanguard and BlackRock. This article has been updated to reflect that Geode only runs funds for Fidelity.

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