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Securities lending lessons for responsible investors

Securities lending is not usually associated with responsible investment, but given the right approach it can bring in incremental income without sacrificing principles.

That was the argument of Roelof van der Struik, a portfolio manager at major Dutch pensions investor PGGM, speaking at a conference of the World Pensions Council in London last week. PGGM’s main client, healthcare pension fund PFZW, has a strong responsible investment policy and wouldn’t tolerate the practice if it wasn’t done properly, he added.

Lending stocks to other investors for short periods is more nuanced than bad press about the activity has portrayed, he argued, and can be reconciled with being a responsible investor. The practice can generate income and create or transform liquidity.

Van der Struik joked that he was known as the “chief crumbs officer” at PGGM after a colleague remarked during a meeting recently that “we should not forget to pick up the crumbs”. Van der Struik said he had “consistently” made 1% on collateralised trades for PGGM.

The gains to be had from securities lending “do not come completely free”, however, said van der Struik.

For example, investors lose their voting rights for the period they lend out the stock. This means that a responsible investor needs to have a policy in place on securities lending and voting to ensure they are complying with their fiduciary duty, the manager said.

He explained that PGGM has “quite a strict policy” on this. It has a list of 100 companies that it does not lend out, and which it always votes on. PGGM voted on 95% of its equity positions last year, he said.

Another issue flagged by van der Struik is “empty voting”, when a party that does not have an economic interest in a company borrows shares just for the votes at an annual meeting.

He said that this was extremely rare, but that the impact was nonetheless quite serious. To mitigate this, investors could write in the contract with the borrower that this practice is not allowed.

“In all our contracts it is disallowed, it is seen in the market as extremely bad practice, and in most jurisdictions it’s illegal,” van der Struik added.

He later told IPE that pension funds get “very mixed signals” about securities lending, he said, with some investment consultants very much in favour and others saying it is incompatible with ESG.

He also explained that the extent to which lending out securities – which could be used for short-selling – makes sense for investors could also depend on whether the securities are held as part of index-tracker funds or a high-conviction segregated mandate.

As concerns short-selling, van der Struik said that “sometimes it’s seen as evil” but that the consensus is that it helps create an efficient market.

He said that most of the bad press that securities lending gets is unjustified, but that headline risk is “one risk that in no way you can mitigate”.

“It’s not a free lunch, but it’s a pretty good investment,” he said.

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