Passive Strategies Seen as a License for Passive Shareholding

Investors felt that passive investment strategies distance them from companies and diminish their influence as shareholders, according to a survey by Hermes Investment Management.

Some 60% of respondents said they expect a rise in allocations to index-linked products would have a negative impact on shareholder influence.

But the fund manager countered that notion, pointing out that power is still in the hands of the shareholder. “If anything, passive investors should engage more, not less,” said Leon Kamhi, Hermes Investment Management’s head of responsibility. “Engagement is the only tool passive investors have to improve the value of the companies they invest in.”

“If anything, passive investors should engage more, not less,”—Leon Kamhi, Hermes Investment ManagementEngagement and stewardship are global issues now, a Hermes report on featuring the survey said. “We live in a global economy and beneficiaries, via their pension funds, are increasingly invested all over the world, not just in the one country which a company or pension fund happens to be domiciled.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The report outlined the strain investors’ resources were being put under, which meant shareholder responsibility was often overlooked.

“Hermes’ stewardship resource (Hermes EOS) is one of the largest of its kind in the world and is only 26 strong,” the report stated. “There is therefore a significant opportunity for asset owners to effectively collaborate and increase their investment in responsible ownership, thereby contributing to ensuring the alignment of companies and public policy makers to the generation of long-term wealth for beneficiaries to enjoy in a sustainable economy.”

Hermes also asked these 109 investors about their view on how they should influence companies’ environmental, social, and governance (ESG) policies. Again, Kamhi said he was troubled by the result.

One in five investors (21%) said he or she believed that challenging companies on ESG was not an important issue. This position is borne out by the low numbers of large investors that have signed the United Nations’ Principles for Responsible Investment, highlighted in CIO’s latest edition.

“Whenever there are poor ESG practices that lead to the destruction of value, investors have a fiduciary duty to speak up,” said Kahmi.

However, the survey showed that less than half of investors (46%) believed companies focusing on ESG issues produce better long-term returns for investors.

JeanmarieGrisi_TimBower Jeanmarie Grisi (Art by Tim Bower)Employees who missed out on joining a corporation’s defined-benefit (DB) pension can still reap rewards—if the plan sponsor chooses leverage it.

Telecommunications conglomerate Acatel-Lucent is among those plan sponsors, leveraging its long-closed DB system for better fees and from using tested managers in its defined contribution (DC) plan.

“We have managers we know really well,” CIO Jeanmarie Grisi—head of more than $38 billion in retirement assets—described in Russell Investments’ latest risk management report. “When we’re looking for a manager for the DC plan, to the extent it is appropriate to leverage our existing relationships, we do.”

Alcatel-Lucent is far down the de-risking path for its DB plans. Earlier this year, it expanded a lump-sum payment offer for retirees to an additional 45,000 pensioners, bringing the total member offers up to nearly 75,000. As of 2014, its DB system included fewer than 10,000 active employees.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“For a very long time—at least 15 years—our liabilities have been more certain, in that 80% to 90% of the liability has been for individuals who no longer work at the company,” according to Grisi. “What we’re trying to do there is leverage the managers that we have on the DB side, as appropriate, for DC.”

A number of the leading innovators in American DC manage traditional pension assets alongside their 401(k) plans. United Technologies CIO Robin Diamonte, for example, remains one of few plan sponsors to wrap guaranteed income options for retirees into a DC default.

Exelon’s Doug Brown—a finalist for CIO’s 2015 DC Innovation Award—likewise manages a legacy pension fund and, more exotically, nuclear decommissioning trusts for the energy provider.

While DB expertise can enhance a defined contribution plan, Grisi noted that the the carryover is far from universal.

“One difference, for example, is that we have a real assets offering in the DC plan, because we feel that inflation is an important component for an individual,” she said. “On the DB side, we don’t have that; there is no inflation indexing of the participants’ benefits.”

Russell’s Chief Research Strategist Bob Collie interviewed Grisi along with nine others for the consultant’s report “Perspectives on Risk Management: Ten Conversations.”

You’re out of free articles!!

Don’t leave before subscribing!