Fund managers are not encouraged to actively influence the actions of the companies they invest in.
How much do you care about the way the companies you invest in are run? If you hold individual shares, you might simply choose not to buy into arms manufacturing or tobacco businesses. But if you like the idea of actively influencing corporate policy, surely the easiest route is to find a fund manager big and ugly enough to force companies to clean up their act, look after their employees properly, take responsibility for their supply chain and stop paying their senior executives exorbitant bonuses for mediocre management?
Unfortunately, it’s not that simple. It’s true that individual shareholders play a pretty marginal role in equity markets these days, and that the key relationship within those markets is between companies and the big asset managers with institutional as well as retail funds to manage. So yes, we small investors do have to rely on our fund managers to hold companies to account.
The trouble is that the system doesn’t nurture that approach. The focus for most active asset managers is on ‘beating the market’, putting pressure on companies to protect their dividends and maintain shareholder value from year to year. Such scenarios are good for shareholders in the short term, but reinvesting cash at times may be a better long-term strategy for a business than paying it out.
Passive funds don’t give a fig for corporate governance
A further issue is the recent explosion in investors’ use of index trackers – passive funds that buy every company in their universe and compete on price alone. Most don’t give a fig for corporate governance issues, yet they are increasingly influential within the market. Sovereign wealth funds (state-owned investment funds) have also become much more significant since 2000, and they too have no interest in active engagement with the businesses they buy.
Moreover, asset management is not a one-way relationship. Fund managers hold the purse-strings; but there is only a limited number of companies producing the shareholder value they seek. Managers may take the line that they cannot afford to jeopardise a long-term relationship by challenging the board to change its ways. All of which makes the launch this autumn of the multi-manager People’s Trust (PT) an interesting proposition. Co-founder Daniel Godfrey has been head (at different times) of both the Association of Investment Companies and the Investment Association, so he knows his asset management onions; he believes there are inherent conflicts of interest in the way the system works, which mean companies aren’t being run as sustainably and responsibly as they should be.
His aim is to do things differently. The People’s Trust has lined up a handful of fund managers with diverse strategies – mostly familiar names to Money Observer readers, we’re told, though the list has not yet been announced – who are ‘brilliant at identifying sustainable companies and then will be patient’, giving those companies time to fulfil their longer-term plans.
The managers will have seven-year contracts (a typical multi-manager would get a maximum three-year deal with a one-year rolling contract thereafter), plus the leeway for short-term underperformance, to enable them to run money in the interest of long-term outcomes that are good for employees, the environment and the economy, as well as PT shareholders.
The trust lays down relatively few rules for managers about the sectors to be avoided: companies producing ‘controversial weapons’ are not acceptable, but a tobacco company ‘moving in the right direction’ by developing new alternatives to cigarettes, for example, might be. ‘It’s better for such a business to have shareholders who care and want to get on board with these issues,’ observes Godfrey.
What about the vexed question of executive remuneration, where huge bonuses, often regardless of outcomes, have become increasingly frequent in corporate culture? ‘We want to see performance-related pay disappear,’ he says. ‘We want to go back to a system where company executives are set objectives as part of their salary, and if they can’t do the job properly they are supported and if necessary replaced.’
To that end, the trust will practise what it preaches, with People’s Trust executives earning no more than 20 times national average earnings (currently around £26,500). That hardly leaves them on the breadline; but ‘it will give us the right to say that pay inequalities need to come down and that performance-related pay should be junked in favour of good old performance management’.
Neil Woodford has already set a precedent for a long-term approach with his Patient Capital Trust (PCT), launched in April 2015, and Godfrey stresses it’s ‘incredibly important’ that someone so high-profile is taking this lead. People’s Trust investors will need to have similar faith in the abilities of the coterie of managers lined up by Godfrey and his advisers at consultancy Willis Towers Watson; but a strong line-up, coupled with Godfrey’s persuasive message of ‘a better way of doing things,’ will be an attractive message for those prepared to take the long view.
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