According to Greta Thunberg, “the danger is when politicians and CEOs are making it look like real action is happening, when in fact almost nothing is being done.” She may find some unlikely bedfellows in the Square Mile.
Active fund managers have endured a torrid time of late. The Woodford saga and M&G’s decision to gate its open-ended property fund have left investor confidence in short supply. Meanwhile, the most recent figures from S&P Dow Jones Indices show that 90 per cent of active equity funds are lagging their passive benchmarks.
The temptation in this unforgiving environment will be to batten down the hatches, particularly as most institutions — save a few star managers — have traditionally shunned the spotlight. In fact, they need to work harder than ever before to demonstrate how they add value over and above the index trackers. Those that are successful can continue to prosper; those that fail will face irrelevance.
Aside from investment selection, active managers can set themselves apart through stewardship — an area where most leading institutions boast strong track records of company engagement and proxy voting. So it’s perhaps no surprise that conversations around these topics are becoming more public.
A good example is Aberdeen Standard Investments, which recently revealed its voting intention ahead of an AGM for the first time, pressing BHP to halt funding for lobbying activity inconsistent with the Paris Agreement.
The logical next step is shareholder activism, a strategy which active managers have been turning to in growing numbers.
We sifted through UK markets data from Activist Insight, separating “conventional active managers” from “pure-play activists” such as Elliott Management and Crystal Amber. The former launched 55 activist demands in 2019 versus 35 in 2018 and just 13 five years ago.
Active managers broadly give equal preference to two key demands: taking balance sheet action, and changing the business strategy. But they are more likely to launch a campaign based on governance-related issues.
What we have yet to see is a specific environmental or social demand in the UK — from an active manager, or indeed a pure-play activist.
This is surprising given the priority that active managers are placing on environmental, social, and corporate governance (ESG) issues. Last year, over 600 institutions signed an initiative to end fossil fuel subsidies and thermal coal use, and set a “meaningful” price for carbon. We’re also now moving to a world where a company with “good” ESG credentials will deserve a premium rating over a company with “bad” ESG credentials.
Traditionally, the debate in this space has been between divestment and engagement, but activism must surely now be moving up the agenda as an alternative option for two reasons.
First, it has started to happen in the US. Pure-play activist fund JANA Partners has already teamed up with the California State Teachers Retirement System to push Apple into addressing smartphone addiction among children. The tech giant affirmed its commitment to young customers the following day, and subsequently introduced new controls.
Second, activism has proven to be an effective strategy in the UK. Over the last five years, more than a third (37 per cent) of the demands made by active managers have been implemented by the companies in question. And there is arguably room for improvement: 57 per cent of the demands made by pure-play activists have been successful.
But don’t expect a stampede. The strategy won’t make sense for most active managers on organisational or cultural levels. It requires a lot of spade work involving an investment in resources at a time when margins are under pressure.
Activism can also present significant reputational risk which needs to be carefully considered. Will the demands be seen as realistic, would they demonstrably deliver shareholder value, and is this really the best way of effecting change? These are just a few of the questions that active managers will be asking prior to pushing the button.
All the ingredients, however, are in place to see the City’s first environmental or social activist campaign in 2020. The big active managers are losing their erstwhile distaste for activism, driven in part by the rise in passive investment.
Numerous studies have shown that ESG drives long-term shareholder value. And active managers are putting ESG at the heart of their fundraising strategies. Don’t be surprised if some start to put their mouths where their money is.
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