GLOBAL - Stewardship, far from being a good fit with the aims and interests of long-term investors, may require a radical re-think of, and may be incompatible with, the way pension funds invest.

These are the conclusions of independent advisor Paul Frentrop, who left his role as head of corporate governance at APG Asset Management at the end of 2010, writing for a special report on stewardship in the February issue of IPE.

In 'The paradoxes of stewardship', Frentrop argues that real stewardship, particularly as defined in the UK Stewardship Code published by the Financial Reporting Council in 2010, requires an investor to give up liquidity, reduce portfolio turnover, endure long periods of relative underperformance, significantly concentrate portfolios and take much larger stakes in single companies.

And he points out that while this idea of stewardship is not a law, it is not just a code either - but a "duty".

"In fact," he writes, "he who promotes stewardship isn't merely asking for improvements in corporate governance. Stewardship implies and demands a whole new system of institutional investor and pension fund governance."

Can an investor really engage with the hundreds of companies in its benchmark, Frentrop asks, or choose not to sell a company it believes to be over-valued?

"There is no 'loyalty' to be expected from institutional investors, who, in the end, are the managers of other people's money," he writes. "When institutional investors talk about integrating engagement into their investment policy, that means, for the most part, that the asset manager will inform the governance department he sold the shares, so the governance people can stop engaging the board. It is in this inglorious way that stewardship ends."

Company management knows this well enough, Frentrop observes, which is why they spend more time engaging with potential investors rather than current investors.

Meanwhile, investors should be asking why they would put members' money into companies that need engagement: "Obviously, the board of such a company is not up to snuff," Frentrop writes.

Elsewhere in the special report, other thought leaders in governance-led investing emphasise the comprehensiveness of the UK Code and the radical implications of its principals.

Colin Melvin, chief executive at Hermes Equity Ownership Services (EOS), recalls US legislation that required investors to use their votes - which led to a box-ticking approach and unthinking, consistent votes in favour of management.

"The ones that were thinking about the votes and engagement with companies found their influence diluted by the unthinking voting - so the unintended consequence was actually poorer rather than better stewardship," he says.

"To address this problem, willingness of long-term investors to act collectively is important because, if they can share resources, they will be able to have a sufficient number of high-quality conversations or engagements, which represents good stewardship."

Adam Steiner, chief executive at SVG Investment Managers, points out that investors cannot align with the Code simply by undertaking to exercise their voting rights and report decisions, nor even by engaging only on their most significant holdings.

Instead, they must accept their responsibilities as equity owners to the market, the economy - indeed, to society - as a whole.

"The Stewardship Code is pretty groundbreaking stuff," he says. "The key points identify the major misunderstanding that most fund managers have of fiduciary duty: the asset managers think their job is to beat the index and their peers, while the client thinks that the asset manager's job is to create wealth for them.

"Particularly the point that says that just because you are underweight a company does not give you the excuse not to engage properly with them is a really profound blow to the heart of that school of asset management."

Steiner speaks in an article asking what institutional investors can learn from activists that includes contributions from Ralph Whitman, founder of Relational Investors, and Robert Machell, partner and investment director at Governance for Owners.

These investors talk about how the informational advantage of close engagement can help activists use the liquidity they enjoy in public markets to improve short-term trading of individual positions, and in doing so they perhaps confirm Frentrop's insight that stewardship is an alpha strategy rather than an investment philosophy, compatible only with absolute (not relative) performance targets and concentrated (not diversified) portfolios.

Covering the international implications of the UK code, the environmental and social aspects of the UK code, the exclusions and re-engagement process, stewardship for bondholders, activist investing and asset manager rankings, 'The engaged investor' will appear in the February 2011 issue of IPE magazine.