Is Fundsmith a new improved fund manager or just a different packaging?
This article first appeared in Aimzine, www.aimzine.co.uk .
There’s nothing I like better on a Wednesday evening than sitting down with a glass of red wine to watch The Apprentice. It’s so warming on a cold evening to be able to righteously mock the young candidates undertaking tasks when they make mistakes that we probably all made at that age but had the good fortune to not have broadcast on prime time TV.
A recent task that was especially challenging was to create a launch advert for a new cleaning product. It sounds quite mundane but that was the point. How do you inject new ideas into a product category that frankly has been advertised to death for the last fifty years? A product category in which there are few, if any, real improvements and in which enhancements are typically product variations such as tablets rather than powder, or a fresh scent. One of the teams produced a TV advert which impressively, but I assume unintentionally, managed to combine sexism, cheesiness, ritual humiliation and a 1960’s style all into a 30 second piece http://www.bbc.co.uk/programmes/p00c2bs6 . I doubt it could have been any better (or worse, depending on your view) if it had been an intentional parody of a 1960’s advert. Worryingly, that team won, or as the Sugar daddy put it, “The other team lost”.
In the real world, this month saw the launch of another apparently new variation of a long established product. Terry Smith launched Fundsmith; a new fund management company. Like selling cleaning products, it’s difficult to make any truly new claims about a fund manager so it all comes down to marketing and advertising messages and Mr Smith has those in abundance.
Mr Smith says that the fund management industry is congested with fund managers ranging from the mediocre to the bad who trade too often thereby eroding investor returns, and that many fund managers are bloated with high fee levels.
Therefore, the Fundsmith whiter-than-white approach will be to run a fund which will have a unique investment process, a long term view and lower costs.
The investment process is that the fund will select a relatively small number of global stocks, probably 20 to 30, and will hold them for long periods with lower levels of trading than other funds, and hence lower expenses being incurred in the fund. It all sounds quite sensible and you begin to wonder why other funds don’t do the same thing. Well, one reason could be that if as a fund manager you’re not buying and selling stocks it can look as if you’re not doing much work at all. In which case how do you justify your fat fees? Another reason is that you want investment ideas which often come from brokers, but brokers aren’t going to call you if you never trade with them. The flow of broker commissions from fund managers can be an important factor as to which fund managers the broker will call from his list.
Clearly some fund managers have done well by this approach of selecting global stocks for the long term. The obvious example is Warren Buffett who has held stakes in companies such as Coca Cola, American Express and Wells Fargo for many years, through his investment vehicle Berkshire Hathaway which was formed over 40 years ago. So, perhaps the Fundsmith investment process isn’t actually so new or unique.
Fundsmith’s claim to be taking the long term view should also be questioned. No long-only fund manager would claim to run their fund on a short term view, although the old joke that a long-term investment is a short-term investment gone wrong probably applies more often than many fund managers would care to admit. A long term view is possible if a fund or fund manager has a track record of performing over the long term but for a new fund it can be difficult to hold out if performance is poor in the short term because the widespread ability that investors have these days of comparing fund performance through online tools makes the pressure on underperforming funds all the greater.
Finally the advantage of lower costs is an interesting one. There is the benefit of lower trading expenses mentioned above. On top of that Fundsmith is charging 1% to 1.5% as an annual fee but that’s no lower than any other fund manager. Infact some fund managers investing in exchange traded funds charge as little as 0.6%. Fundsmith has no initial fee on investment into the fund but, whilst this always used to be a big drag on returns and was usually around 5%, for some time now it has been handed back to investors when they invest through an online funds website.
So, all in all it’s difficult to see any compelling reason for investing in Fundsmith funds as opposed to any other. At least with cleaning products, you can hold your white sheets up to the sun and see that the gravy and ketchup stains have been dissolved away but anyone investing in Fundsmith does not have anything tangible on which to make the buying decision. Many of course will be swayed by Mr Smith’s decision to put his money where his mouth is, but then some might say that he has plenty of both of those assets to play with. Even so, an investment of £25 million isn’t pin money even to Terry Smith.
As with washing powder, it may claim to be new and improved and it might well be, but frankly it’s quite difficult to tell the difference between two white sheets, and right now it’s even more difficult to tell the difference between Fundsmith and other fund managers. If you like the idea of investing to the Fundsmith tune then you could always use their selection criteria (on their website) to build your own portfolio of 20-30 companies or even better still wait for their investment reports to be published and then buy into those stocks directly
Ash Mehta is an independent Finance Director consultant working with a portfolio of growing companies, having recently sold Orchard Growth Partners where he was Founder and CEO. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations. You can read his blog at www.ashmehta.co.uk and comment on this article by emailing ash@ashmehta.co.uk .
Showing posts with label fund manager. Show all posts
Showing posts with label fund manager. Show all posts
Thursday, 16 December 2010
Thursday, 11 November 2010
Quote of the year - strong contender
Can a fund manager really be this ridiculous?
Well, the year is nearly over and there have been some good quotes bandied around this year but a latecomer has appeared courtesy of an anonymous fund manager.
Now, we know that fund managers are always being ridiculed by the press. Commentators accuse them of having a herd mentality by following each other into certain shares for fear of being left out of the “next big thing”. Others accuse them of actually destroying the value of investors by their poor selection of shares and making things worse by creaming off a few percent of the funds every year for themselves, whether the fund has a good year or bad year.
Perhaps, we should lay off the attacks because on the basis of this contender for quote of the year, some of them appear to be able to ridicule themselves without our support.
During the last 12 months there have been very few companies coming to IPO and the main reason for this has been that fund managers have been nervous about valuations of companies coming to market and haven’t wanted to invest their surplus cash. So, no fund manager support, no IPO for the company. “Simples” as a meerkat would say. Well, not if you’re this particular fund manager, who said;
“There are serious questions to be asked, [such as] why a company which was so reliant on just two people was allowed to list in the first place.”
The answer to this “serious question” is because fund managers (like the contributor of this quote who is a large shareholder) supported it, despite the fact that the risk factors section in the IPO document specifically mentioned the reliance on two employees.
The irony of all this, as the price has fallen from 220p at IPO last December to 115p today, is that the company he is referring to is Gartmore, a well known errr…. fund manager. Ouch!
Saturday, 7 August 2010
Squids in from stock picking
Who can you trust to manage your pension?
Another World Cup over and we can now thankfully go back to four more years of misery and bitterness about England s latest catastrophic attempt to recapture the trophy since whenever it was. For the neutral spectator though there were moments of excitement from the prominence of hitherto low key performers such as Thomas Mueller, Asamoah Gyan, Diego Forlan and of course Paul the Octopus, who accurately predicted the results of a number of games during the tournament.
A strong individual performance on the World Cup stage doubtless increases the value of the performer and those individuals can probably look forward to tempting offers from suitors keen to benefit from their skills. All of them of course except Paul the Octopus, which is a shame as there are probably no end of fund management groups who could benefit from Paul s predictive skills.
But let's face it, that s a ridiculous suggestion. When funds produce a poor performance in a period, the managers will usually talk about performance over the long term. Unfortunately, Paul despite his predictive skills probably hasn't foreseen that he can t have a long term perspective on anything. Infact his outlook is distinctly short term and probably involves being sliced and deep fried in batter to satisfy the momentary whim of some peckish office worker.
I know what you re going to say. Here he goes again criticising fund managers. He s obsessed. Well I can assure you I'm not obsessed, and I definitely do not have any obsessive compulsive type disorder. I ve checked. Many, many, many times infact. And the only reason I wash my hands so often is that when you travel frequently on the Waterloo and City line all you can think about for the rest of the day is the rapidly multiplying fauna growing quietly on the palms of your hands where you ve touched the travelator handrail or, heaven forbid, another person. Thank goodness that more and more buildings are providing alcohol gels at Reception.
Importance of Fund Managers
So, I m not obsessive but everywhere I look various news stories lead back to the importance of fund managers; not just their importance to the City but their importance in all of our lives.
For example, this month the self-styled Public Sector Pensions Commission, which is funded by the Institute of Directors and a number of think-tanks (no relation to Paul the Octopus and his water-filled think-tank), including the Institute of Economic Affairs and Policy Exchange, issued a report (1) discussing the issue of public sector pensions. In the short term they propose some minor tinkering including public sector employees paying an extra 2% of salary, but their long term proposal includes the switch for public sector employees into funded defined contribution schemes.
Difficult to argue with when people are living longer and the liabilities for the taxpayer are unlimited and unfunded, and of course the IoD represents companies which would rather pay less tax. But if there are to be funded schemes then who will run them? Of course it will be existing fund management groups, to whom a higher percentage of the population will then look for delivering strong performances to fund their pensions.
As far as delivering strong performance is concerned, another interesting publication this month was a report called Exploiting Uncertainty in Investment Markets by Create Research (2) but funded by Citi Group. If you can get past the rose-tinted view of the fund management industry and the business school style of writing with phrases such as "The credit crisis is in the rear view mirror" then it is well worth a read. The report predicts that the share of indexed funds out of total global assets will rise from around 15% to 25%. That means that funds which are currently actively managed may move to a passive index model. One fund manager was unsurprised, being quoted as saying that "Most of our clients no longer subscribe to the idea that active managers deliver excess returns". As well as reducing volatility for the investor this passive approach should also reduce fees. But will it? It s been a fairly open secret in the City that many funds claiming to be active are largely passive (so called closet trackers) but by claiming to be active they can charge higher fees to their investors, supposedly for the expertise they provide in cleverly picking the right stocks.
Closet Trackers
To back this up, in June 2010, the Financial Times, using data provided by Morningstar, the business news and data provider, used a metric and identified 19 funds that were highlighted as potential closet trackers. The list included funds run by well known names such as Standard Life, Royal London and Santander. Some of the funds were found to have a very close correlation with the FTSE All-Share over three and five years despite having charges almost double those of a typical passive fund. The loser, of course, is the investor, although if you are invested unknowingly in one of these funds through your pension you are none the wiser, and you rely on your pension trustees to not be hoodwinked by such funds.
It's no wonder then that more and more people choose to manage their own investments; the SIPP industry for example has grown rapidly in the last few years, driven by the public s growing distrust of professional investors and also by the ease of online SIPP accounts. Infact, half a million of us choose to use SIPPs for our pension provision and those SIPP accounts contain over £50 billion of assets.
When we consider how successful some fund managers are at stock picking let s not mention the proverbial monkey throwing darts at a dart board because that anecdote always upsets fund managers. But perhaps we are all better off if funds just invest passively? And, frankly if a monkey is so talented that he can throw darts and select stocks for high alpha then he deserves a fund manager's salary.
In search of better performance
Stories of monkeys or school children or pensioners running active funds that perform better than fund managers appear frequently. We all think we can pick stocks better than the professionals in the same way that we could all manage the England football team better than the incumbent England manager. The sad truth, however, is that most of us probably can't. Even if most private investors withdrew their Ocado applications last week realising they were investing in a company which not only has never made a profit but also which without the fundraising was heading towards insolvency faster than a shopping trolley towards a display of stacked baked bean tins, it may be that the fund managers who did invest know better. Time will tell.
So if we're better off not entrusting the UK s pensions management to individuals like me who manage our pension portfolio on a wet Sunday afternoon, we had better ensure that the Government and its agencies make the fund management industry work more effectively, efficiently and fairly. That isn t going to be easy but its probably preferable to trying to find our very own cephalopod mollusc with paranormal powers to choose our stocks.
(1) http://www.public-sector-pensions-commission.org.uk/wp-content/themes/pspc/images/Public-Sector-Pensions-Commission-Report.pdf
(2) http://www.create-research.co.uk/pubRes/pubResearch.html
(c) Ash Mehta 2010
This article first appeared in Aimzine, www.aimzine.co.uk
Another World Cup over and we can now thankfully go back to four more years of misery and bitterness about England s latest catastrophic attempt to recapture the trophy since whenever it was. For the neutral spectator though there were moments of excitement from the prominence of hitherto low key performers such as Thomas Mueller, Asamoah Gyan, Diego Forlan and of course Paul the Octopus, who accurately predicted the results of a number of games during the tournament.
A strong individual performance on the World Cup stage doubtless increases the value of the performer and those individuals can probably look forward to tempting offers from suitors keen to benefit from their skills. All of them of course except Paul the Octopus, which is a shame as there are probably no end of fund management groups who could benefit from Paul s predictive skills.
But let's face it, that s a ridiculous suggestion. When funds produce a poor performance in a period, the managers will usually talk about performance over the long term. Unfortunately, Paul despite his predictive skills probably hasn't foreseen that he can t have a long term perspective on anything. Infact his outlook is distinctly short term and probably involves being sliced and deep fried in batter to satisfy the momentary whim of some peckish office worker.
I know what you re going to say. Here he goes again criticising fund managers. He s obsessed. Well I can assure you I'm not obsessed, and I definitely do not have any obsessive compulsive type disorder. I ve checked. Many, many, many times infact. And the only reason I wash my hands so often is that when you travel frequently on the Waterloo and City line all you can think about for the rest of the day is the rapidly multiplying fauna growing quietly on the palms of your hands where you ve touched the travelator handrail or, heaven forbid, another person. Thank goodness that more and more buildings are providing alcohol gels at Reception.
Importance of Fund Managers
So, I m not obsessive but everywhere I look various news stories lead back to the importance of fund managers; not just their importance to the City but their importance in all of our lives.
For example, this month the self-styled Public Sector Pensions Commission, which is funded by the Institute of Directors and a number of think-tanks (no relation to Paul the Octopus and his water-filled think-tank), including the Institute of Economic Affairs and Policy Exchange, issued a report (1) discussing the issue of public sector pensions. In the short term they propose some minor tinkering including public sector employees paying an extra 2% of salary, but their long term proposal includes the switch for public sector employees into funded defined contribution schemes.
Difficult to argue with when people are living longer and the liabilities for the taxpayer are unlimited and unfunded, and of course the IoD represents companies which would rather pay less tax. But if there are to be funded schemes then who will run them? Of course it will be existing fund management groups, to whom a higher percentage of the population will then look for delivering strong performances to fund their pensions.
As far as delivering strong performance is concerned, another interesting publication this month was a report called Exploiting Uncertainty in Investment Markets by Create Research (2) but funded by Citi Group. If you can get past the rose-tinted view of the fund management industry and the business school style of writing with phrases such as "The credit crisis is in the rear view mirror" then it is well worth a read. The report predicts that the share of indexed funds out of total global assets will rise from around 15% to 25%. That means that funds which are currently actively managed may move to a passive index model. One fund manager was unsurprised, being quoted as saying that "Most of our clients no longer subscribe to the idea that active managers deliver excess returns". As well as reducing volatility for the investor this passive approach should also reduce fees. But will it? It s been a fairly open secret in the City that many funds claiming to be active are largely passive (so called closet trackers) but by claiming to be active they can charge higher fees to their investors, supposedly for the expertise they provide in cleverly picking the right stocks.
Closet Trackers
To back this up, in June 2010, the Financial Times, using data provided by Morningstar, the business news and data provider, used a metric and identified 19 funds that were highlighted as potential closet trackers. The list included funds run by well known names such as Standard Life, Royal London and Santander. Some of the funds were found to have a very close correlation with the FTSE All-Share over three and five years despite having charges almost double those of a typical passive fund. The loser, of course, is the investor, although if you are invested unknowingly in one of these funds through your pension you are none the wiser, and you rely on your pension trustees to not be hoodwinked by such funds.
It's no wonder then that more and more people choose to manage their own investments; the SIPP industry for example has grown rapidly in the last few years, driven by the public s growing distrust of professional investors and also by the ease of online SIPP accounts. Infact, half a million of us choose to use SIPPs for our pension provision and those SIPP accounts contain over £50 billion of assets.
When we consider how successful some fund managers are at stock picking let s not mention the proverbial monkey throwing darts at a dart board because that anecdote always upsets fund managers. But perhaps we are all better off if funds just invest passively? And, frankly if a monkey is so talented that he can throw darts and select stocks for high alpha then he deserves a fund manager's salary.
In search of better performance
Stories of monkeys or school children or pensioners running active funds that perform better than fund managers appear frequently. We all think we can pick stocks better than the professionals in the same way that we could all manage the England football team better than the incumbent England manager. The sad truth, however, is that most of us probably can't. Even if most private investors withdrew their Ocado applications last week realising they were investing in a company which not only has never made a profit but also which without the fundraising was heading towards insolvency faster than a shopping trolley towards a display of stacked baked bean tins, it may be that the fund managers who did invest know better. Time will tell.
So if we're better off not entrusting the UK s pensions management to individuals like me who manage our pension portfolio on a wet Sunday afternoon, we had better ensure that the Government and its agencies make the fund management industry work more effectively, efficiently and fairly. That isn t going to be easy but its probably preferable to trying to find our very own cephalopod mollusc with paranormal powers to choose our stocks.
(1) http://www.public-sector-pensions-commission.org.uk/wp-content/themes/pspc/images/Public-Sector-Pensions-Commission-Report.pdf
(2) http://www.create-research.co.uk/pubRes/pubResearch.html
(c) Ash Mehta 2010
This article first appeared in Aimzine, www.aimzine.co.uk
Tuesday, 1 June 2010
Vote? I think I'll outsource that
Do fund managers have a duty to decide for themselves how to vote?
Well thank goodness its June and two major events are over. Firstly the eruption of that volcano with the long name beginning with E which I won t write because it isn t in my spell-check. I sympathise with people who were stranded far from home for long periods of time but I would like to point out the disruption to my working day of listening to people talking about Ash being a nuisance. If I had one Icelandic Krona for every such comment I think I would be very wealthy now, in Icelandic Krona at least (how much is that in Great British Pounds?).
Secondly, the general election. Like many in the business community I m pleased it s all over because with spending cuts announced and a budget imminent from the new government we should now have a period, coalition permitting, of some economic certainty; however unpleasant the certainty might be. One thing that surprised me about the election period was that there was relatively little mudslinging and few shenanigans despite the last government being the most unpopular for some time.
Passing on Responsibility
The most eye-catching shenanigans were reports of the alleged fraudulent abuse of postal voting in some parts of the country. There were accusations that in some households there were as many as eight people registered to vote and that this must be due to fraudulent registrations. Channel 4 News covered this story very well and went into the house of a local councillor in south east London implicated in the affair. She showed them eight beds and eight toothbrushes which seemed to indicate that there were indeed eight voters in the house.
But this story got me thinking; so what if some people were voting on behalf of others? Perhaps those other people were happy with this. Perhaps some people just couldn t be bothered to read the parties manifestos (and let s face it how many of us did?), but still felt they ought to participate in the democratic process. What if those people passed the responsibility on to other more knowledgeable people whom they trusted to evaluate the manifestos and accepted advice on how to vote in the best way for the country and themselves. Would there be anything wrong with that? Is it bringing the democratic process into disrepute? Is it morally and ethically suspect? Do we have a duty to decide for ourselves how we vote?
AGM Time
May, of course, is also the month of AGMs for many companies. Whilst few companies get a good turnout of shareholders, it s always interesting to see how the proxy votes have been cast for resolutions at an AGM, especially where there is something potentially controversial.
Unfortunately, its not unknown for lazy institutional shareholders to just put a tick in the For column assuming that this is the default that the company wants and I heard that in one case this caused a problem because a dissident shareholder was inadvertently voted onto the board of a company due to shareholders not reading the notice of AGM properly.
So, in light of Lord Myners pleading post credit crunch that institutional shareholders should engage with companies they invest in and not become absentee landlords , how seriously do institutional shareholders take their voting responsibilities? Talking to various advisers in the City, it seems to be generally accepted that institutional shareholders don t devote a great deal of time on deciding how to vote and actually executing their votes. This can be especially troublesome when there is a corporate transaction to get passed at a general meeting of a company. The company would often like to show a high level of support from shareholders for a transaction but brokers often worry that those supportive shareholders will not get their act together to submit their votes.
PAFs
Over the last month or two many Finance Directors of public companies will have received questionnaires from proxy advisory firms ( PAFs ) requesting further information relating to resolutions to be tabled at forthcoming AGMS. Whilst these firms provide a wide range of services including risk management, automated voting and financial research, a core offering is analysing Annual Reports and AGM resolutions of public companies and issuing advisory notes to their fund manager clients. PAFs now form a rapidly growing business and the largest, RiskMetrics, services 2,400 clients worldwide and recently reported revenues of $77 million for the first quarter of 2010.
PAFs are now becoming increasingly vocal about governance matters and arguably providing a useful voice in the governance debate. Only last week RiskMetrics issued a critical note of the Prudential s proposed acquisition of AIA, the Asian business of AIG, and urged its clients to vote against the deal.
Over the last year, other companies have been the subject of proxy advisory firms ire; Marks and Spencer, BT and Tesco are amongst those to have come under the spotlight for their remuneration excesses. Infact, in 2009 RiskMetrics recommended voting against the re-election of 20% of the directors in the companies it covers worldwide.
But is this growing influence by PAFs a problem? Surely not, as the Association of British Insurers has been undertaking such a role for some time, issuing red, amber, blue and green "tops" to alert members to corporate governance issues in annual reports. Supporters would argue that this analysis is increasing the sum of all knowledge and allowing shareholders to make informed decisions about how to vote. In fact the industry is even increasing the range of topics covered. Recently, Glass Lewis, a US proxy advisory firm, began to include environmental and social data to its research service; a response to client demand in recognition of the fact that this is a growing area of risk for many companies and hence a factor in shareholder returns.
Important Issues
Another trend over recent years has been that in many financial institutions the people actually voting for or against resolutions in companies now form departments of their own, staffed by corporate governance experts, totally separate from the fund managers holding the investment. This whole area gives rise to what I believe are some very important issues.
Should we question whether this separation is healthy and does the additional layering of a third party in the form of PAFs make it any less (or more) healthy?
Does it mean that these corporate governance departments vote on a tick-box basis without really understanding the specific circumstances of each company their colleagues in fund management are invested in.
Should boards of public companies be concerned that at the recommendation of one advisory firm they could face a massive block vote due to investors blindly following advice from advisory firms?
What does the intermediary role of PAFs mean for the engagement by investors with companies they invest in? Is it potentially undermining the increased engagement sought by regulators and governments?
Should we expect our pension fund and investment managers to be forming their own opinions on the acceptability of transgressions by companies, taking them in the full context of company performance and history rather than on a purely standalone governance basis?
Moreover do fund managers have the skills to play this role and do their bosses allow them to perform it?
I don't know the answers to these questions but as we slowly emerge from the banking crisis these are probably matters we need to be asking if we are to avert a crisis in this sector. It may sound like a relative backwater in the financial world but then so did ratings agencies before the credit crunch.
Finally, let s accept that in any business there will be competition and the PAF industry is no different. As a PAF how do you differentiate yourself from your competitors? Do you become more strident? Do you seek conflict to demonstrate your strength and gain headlines and publicity for your own business needs?
All publications like to promote their power and influence. After the 1992 general election which unexpectedly produced a fourth successive Conservative victory, The Sun proudly proclaimed, in true Kelvin Mackenzie style, It's The Sun Wot Won It . How many people actually outsourced their voting decision to The Sun, we will never know. If PAFs become too powerful and there is more outsourcing of proxy voting then will the shareholder engagement which Lord Myners has been encouraging for effective challenge to boards of public companies be lost for ever?
If so, that could have serious ramifications for the City and make a few fraudulent postal votes in general elections seem fairly trivial.
(c) Ash Mehta
This article first appeared in Aimzine, www.aimzine.co.uk .
Well thank goodness its June and two major events are over. Firstly the eruption of that volcano with the long name beginning with E which I won t write because it isn t in my spell-check. I sympathise with people who were stranded far from home for long periods of time but I would like to point out the disruption to my working day of listening to people talking about Ash being a nuisance. If I had one Icelandic Krona for every such comment I think I would be very wealthy now, in Icelandic Krona at least (how much is that in Great British Pounds?).
Secondly, the general election. Like many in the business community I m pleased it s all over because with spending cuts announced and a budget imminent from the new government we should now have a period, coalition permitting, of some economic certainty; however unpleasant the certainty might be. One thing that surprised me about the election period was that there was relatively little mudslinging and few shenanigans despite the last government being the most unpopular for some time.
Passing on Responsibility
The most eye-catching shenanigans were reports of the alleged fraudulent abuse of postal voting in some parts of the country. There were accusations that in some households there were as many as eight people registered to vote and that this must be due to fraudulent registrations. Channel 4 News covered this story very well and went into the house of a local councillor in south east London implicated in the affair. She showed them eight beds and eight toothbrushes which seemed to indicate that there were indeed eight voters in the house.
But this story got me thinking; so what if some people were voting on behalf of others? Perhaps those other people were happy with this. Perhaps some people just couldn t be bothered to read the parties manifestos (and let s face it how many of us did?), but still felt they ought to participate in the democratic process. What if those people passed the responsibility on to other more knowledgeable people whom they trusted to evaluate the manifestos and accepted advice on how to vote in the best way for the country and themselves. Would there be anything wrong with that? Is it bringing the democratic process into disrepute? Is it morally and ethically suspect? Do we have a duty to decide for ourselves how we vote?
AGM Time
May, of course, is also the month of AGMs for many companies. Whilst few companies get a good turnout of shareholders, it s always interesting to see how the proxy votes have been cast for resolutions at an AGM, especially where there is something potentially controversial.
Unfortunately, its not unknown for lazy institutional shareholders to just put a tick in the For column assuming that this is the default that the company wants and I heard that in one case this caused a problem because a dissident shareholder was inadvertently voted onto the board of a company due to shareholders not reading the notice of AGM properly.
So, in light of Lord Myners pleading post credit crunch that institutional shareholders should engage with companies they invest in and not become absentee landlords , how seriously do institutional shareholders take their voting responsibilities? Talking to various advisers in the City, it seems to be generally accepted that institutional shareholders don t devote a great deal of time on deciding how to vote and actually executing their votes. This can be especially troublesome when there is a corporate transaction to get passed at a general meeting of a company. The company would often like to show a high level of support from shareholders for a transaction but brokers often worry that those supportive shareholders will not get their act together to submit their votes.
PAFs
Over the last month or two many Finance Directors of public companies will have received questionnaires from proxy advisory firms ( PAFs ) requesting further information relating to resolutions to be tabled at forthcoming AGMS. Whilst these firms provide a wide range of services including risk management, automated voting and financial research, a core offering is analysing Annual Reports and AGM resolutions of public companies and issuing advisory notes to their fund manager clients. PAFs now form a rapidly growing business and the largest, RiskMetrics, services 2,400 clients worldwide and recently reported revenues of $77 million for the first quarter of 2010.
PAFs are now becoming increasingly vocal about governance matters and arguably providing a useful voice in the governance debate. Only last week RiskMetrics issued a critical note of the Prudential s proposed acquisition of AIA, the Asian business of AIG, and urged its clients to vote against the deal.
Over the last year, other companies have been the subject of proxy advisory firms ire; Marks and Spencer, BT and Tesco are amongst those to have come under the spotlight for their remuneration excesses. Infact, in 2009 RiskMetrics recommended voting against the re-election of 20% of the directors in the companies it covers worldwide.
But is this growing influence by PAFs a problem? Surely not, as the Association of British Insurers has been undertaking such a role for some time, issuing red, amber, blue and green "tops" to alert members to corporate governance issues in annual reports. Supporters would argue that this analysis is increasing the sum of all knowledge and allowing shareholders to make informed decisions about how to vote. In fact the industry is even increasing the range of topics covered. Recently, Glass Lewis, a US proxy advisory firm, began to include environmental and social data to its research service; a response to client demand in recognition of the fact that this is a growing area of risk for many companies and hence a factor in shareholder returns.
Important Issues
Another trend over recent years has been that in many financial institutions the people actually voting for or against resolutions in companies now form departments of their own, staffed by corporate governance experts, totally separate from the fund managers holding the investment. This whole area gives rise to what I believe are some very important issues.
Should we question whether this separation is healthy and does the additional layering of a third party in the form of PAFs make it any less (or more) healthy?
Does it mean that these corporate governance departments vote on a tick-box basis without really understanding the specific circumstances of each company their colleagues in fund management are invested in.
Should boards of public companies be concerned that at the recommendation of one advisory firm they could face a massive block vote due to investors blindly following advice from advisory firms?
What does the intermediary role of PAFs mean for the engagement by investors with companies they invest in? Is it potentially undermining the increased engagement sought by regulators and governments?
Should we expect our pension fund and investment managers to be forming their own opinions on the acceptability of transgressions by companies, taking them in the full context of company performance and history rather than on a purely standalone governance basis?
Moreover do fund managers have the skills to play this role and do their bosses allow them to perform it?
I don't know the answers to these questions but as we slowly emerge from the banking crisis these are probably matters we need to be asking if we are to avert a crisis in this sector. It may sound like a relative backwater in the financial world but then so did ratings agencies before the credit crunch.
Finally, let s accept that in any business there will be competition and the PAF industry is no different. As a PAF how do you differentiate yourself from your competitors? Do you become more strident? Do you seek conflict to demonstrate your strength and gain headlines and publicity for your own business needs?
All publications like to promote their power and influence. After the 1992 general election which unexpectedly produced a fourth successive Conservative victory, The Sun proudly proclaimed, in true Kelvin Mackenzie style, It's The Sun Wot Won It . How many people actually outsourced their voting decision to The Sun, we will never know. If PAFs become too powerful and there is more outsourcing of proxy voting then will the shareholder engagement which Lord Myners has been encouraging for effective challenge to boards of public companies be lost for ever?
If so, that could have serious ramifications for the City and make a few fraudulent postal votes in general elections seem fairly trivial.
(c) Ash Mehta
This article first appeared in Aimzine, www.aimzine.co.uk .
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