EUROPE - Asset managers and pension funds in the UK too often understand too little of the companies in which they invest, according to a recent paper delivered in Brussels.

The paper - authored by Charles Cronin and John Mellor of the Foundation for Governance, Research and Education - was a response to a fact-finding exercise by the European Commission aimed at combating investment short-termism.

At the launch of a new study on stewardship in the Belgian capital, Cronin - formerly of the CFA Institute - argued that few fund managers, when meeting with senior management teams of an issuer, were able to discuss the "big picture".

After canvassing the opinions of "several chairman from some of Britain's leading public companies", Cronin and Mellor found a "dismal situation" resulting mostly from the "poor mandates" given by trustees to fund managers.

Cronin called for a reform predicated on "engagement", adding: "Hunting for inside information is not engagement."

He told representatives from the European Parliament, the European Commission, the capital markets, banks, accountancy organisations and international law firms that proper engagement between fund managers and investee companies should include "discussing strategy, the composition of the board, risks and opportunities of the business".

He described this approach as "thoughtful ownership".

"Some would say this form of engagement is costly, and not worth the effort," he said.

"We would say that, without a thorough understanding of the business, one is unable to determine its [fundamental] value."

Cronin blamed the status quo on the fact that, while the fund manager is hired for his skill as a stock picker, his ability to pick stocks is judged on how he performs quarterly, relative to a designated benchmark.
A manager's portfolio can therefore contain many hundreds of stocks - "too many to value with confidence under conventional fundamental principles".

In a previous interview, with IPE, Cronin faulted fund trustees - not managers - for short-term thinking.

It is the asset owners' employment of fiduciary duty that needs attention, he added.

His suggested remedies include upgrades to provisions in investment legislation, such as by making additions to the EU's Occupational Retirement Provision Directive, which is currently under revision.

The need would be to clarify the duties of asset owners and trustees, Cronin said.

Marc Hertgen, policy officer in the Commission's Corporate Governance Unit, told the Brussels delegates that a synthesis of responses to the exercise could be expected as early as November.

The stewardship initiative has to be seen against earlier work by the UK National Association of Pension Funds.

In a guide addressed to pension fund trustees, the association also argues against excessive focus on 'short-termism'.