This week - on Tuesday 12 March - the UK holds its first 'Ownership Day', a day dedicated to raising awareness of the benefits of active ownership.
Active ownership, or stewardship, refers to using shareholder rights to improve the long-term value of a company. For all investors - from individuals with ISAs and savings to global institutional investors - it is about understanding that you are a part-owner of the companies whose shares you hold and therefore should encourage those who manage your money to engage with those companies to protect and grow the value of your assets. That involves using both AGM votes and direct communication to support effective and well-executed business strategies and to challenge poor risk management, ineffective delivery or a disproportionate focus on short-term issues at the expense of long-term value.
To those outside the financial industry it may seem obvious that investment managers should understand and influence the vision and strategies of investee companies to ensure good long-term returns. However it is an approach the investment chain seems to be working less well to incentivize than other more short-term techniques. For example, Generation Investment Management found that the average US mutual fund now turns over its entire portfolio every seven months compared to every seven years two decades ago.
The global assets placed in voting and engagement strategies remain small compared to strategies that favour more short-term trading in equities or even high frequency computer-based trading.
Adding Value
The failure of pension funds, retail investors and other end investors to demand high quality active ownership from their managers is particularly surprising given the growing body of evidence showing that active ownership can result in strong returns.
For example, the research that garnered last year's Moskowitz Prize for Sustainable Investing analysed shareholder activism with US companies over ten years to 2009 and found that share prices rose by an average of 4.4% in the year after engagements were concluded.
Pensions like the Environment Agency Pension Fund (EAPF) tell a similar story. In a typical year EAPF's investment managers and external service providers cast over 35,000 votes on their behalf and undertake more than 800 engagements with companies on issues such as their quality of corporate governance. They argue that this active ownership has been a factor in the fund returning more than 16% since 2009 and posting a total return of 5.1% in 2012, almost double the average 2.6% of the UK's other Local Government Pension Schemes. .
Active ownership also helps investors to manage risk. For example, the research team at WHEB Asset Management cite the case of UK retailer and distributor Findel plc who rebuffed shareholder engagements on business ethics-related risks in 2010, only to then suffer public controversy around its corporate accounting entries; leading the stock to lose considerable value, including a dramatic 12% fall in one day. Some active managers had withdrawn capital from Findel before the decline as the failure of the engagement had highlighted the risk.
Savers and investors must ask for ownership
Perhaps one of the reasons that more asset owners such as pension funds do not adopt a long-term active ownership strategy is because of the problem of attribution - it can be difficult for an investor to attribute a rise in profitability or share price directly to an improvement that a specific ownership activity has brought about. Or it may simply be that there remains insufficient awareness of what can be achieved.
To mark Ownership Day, I therefore ask all retail investors, pension trustees and other asset owners to ask their investment managers about the levels of active ownership that exist in their portfolios.
Active ownership is in the interests of investors, companies and society because it encourages a greater focus on effective long-term wealth creation. But ultimately, the benefits will be achieved only if it is demanded and valued by the pension funds, insurance companies, financial advisers and private investors that drive investment management.
For more information about Ownership Day visit: http://uksif.org/ownership-day/