Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 409

Why investment stewardship matters for long-term investors

Each year in the lead-up to company reporting season, individuals who invest directly in publicly listed companies receive notifications informing them of their right to vote at a company’s upcoming Annual General Meeting (AGM). The notification also describes the list of resolutions that would be put to a vote as part of the AGM. A person who directly holds shares in a large number of companies can expect a crowded inbox during the peak of proxy voting season, which is during October and November for many Australian companies.

But for the growing number of investors who invest only in managed funds or exchange-traded funds (ETFs), they don’t receive these letters even though they own a portion of the companies.

Instead, the fund managers cast votes (known as ‘proxy’ votes) at company meetings as part of the 'investment stewardship' service - and obligation - that fund managers carry out on behalf of the funds’ investors. While each fund manager does this differently, the professionals in a properly-resourced investment stewardship team have broad financial market experience and deep expertise in areas of corporate governance, policy, regulation, and social and environmental risk analysis.

The why and the how

Proxy voting is not the only activity that occurs as part of the investment stewardship process, and for many managers, it may not even be the most important. The role of fund managers as stewards or trustees of the shares is primarily to be a voice for investors acting in their best interests.

This is a fiduciary responsibility that good fund managers take very seriously and includes actively meeting (or 'engaging') with companies on a regular basis, voting on shareholder resolutions (a vote put forward by an owner of the shares rather than by the company’s management) and, where appropriate, taking part in public advocacy activities.

The aim is to ultimately hold companies accountable for delivering long-term investment returns to investors. This approach seeks to ensure that companies in a portfolio have robust strategies that not only position them for growth and success, but are actively managing risks that are financially material, or entail risks that may lead to short-term gains but impede the company’s long-term performance or value.

For example, investment stewardship teams often place great emphasis on the composition of a company’s board, including factors such as whether the board is sufficiently independent from management and suppliers, and whether it has a suitable mix of skills and experience, and whether the board is appropriately diverse.

Investment stewardship teams also analyse and vote on companies’ executive remuneration practices. Over the long run, company shareholders stand to benefit when executive remuneration plans incentivise a company’s long-term value creation and outperformance versus its industry peers.

Over the past decade, long-term investors have been placing greater focus on the board’s oversight of company strategy and risks, including social and environmental risks. This can include workplace culture issues, treatment of community stakeholders, corporate fraud and financial crimes, large-scale industrial incidents that result in reputational damage, or other practices that pose a threat to people’s health, safety, or dignity. If such risks are not properly managed and overseen, they can erode shareholder value.

The most widespread example of this today, across virtually all industry sectors, relates to climate change risks and how companies are planning to manage their business in response to the increasingly urgent pressure to transition to a low carbon economy over coming decades.

Passive management does not mean passive ownership

Critics of large index fund managers often believe that a 'passive' approach to fund management equates to a passive approach to investment stewardship. In other words, that these fund managers merely invest as directed by the index and have little concern for material environmental, social and governance (ESG) risk.

For Vanguard, the opposite is true. Index funds are designed to buy and hold the shares of the companies in their appointed benchmark in virtual perpetuity (or as long as the shares are included in the index). The funds can’t use discretion to buy more shares of companies deemed to be promising or sell out of companies that may be bad actors.

Issues that are financially material to the long-term investment returns will regularly be on the agenda for index funds and will remain so long after shorter term investors have sold out of their positions. The investment stewardship tools of proxy voting, engagement, and public advocacy are the most important levers that index funds have to ensure that companies are acting in the best interests of their longest-term investors.


Register here to receive the Firstlinks weekly newsletter for free

Why it matters

People choose to invest through managed funds, index funds, and ETFs for a variety of reasons, including low costs, diversification and ease of implementation. And for those who prefer to keep their investments at arm’s length, it is easy to dismiss this process as unimportant or too complicated to bother engaging with or reading up about.

But while investment stewardship outcomes may not be apparent in a daily share price or a quarterly statement, these teams work relentlessly to promote and safeguard shareholder value over the course of years and decades.

If you care about how your investment performs over the long term and whether it will deliver the returns you reasonably expect, it’s worth the extra step to ensure that the fund’s investment stewardship team is taking a stand on behalf of its investors.

 

Lisa Harlow is Head of Vanguard Investment Stewardship, Asia Pacific. Vanguard Australia is a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any individual.

For articles and papers from Vanguard, please click here.

 

RELATED ARTICLES

Worries over the planned proxy rule changes in Australia

Voting your shares: it’s worth the effort

Investor downside when management controls access to the board

banner

Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

How to help people with retirement spending decisions

Super funds will soon be required to offer retirement income strategies for members in decumulation. With uncertain returns, uncertain timelines, and different goals, it's possibly “the hardest, nastiest problem in finance".

Tips when taking large withdrawals from super

You want to take a lump sum from your super, but what's the best way? Should it come from you or your spouse, or the pension or accumulation account. There is a welcome flexibility to select the best outcome.

Latest Updates

Interviews

John Woods on diversification using asset allocation

All fund managers now claim to take ESG factors into account, but a multi-asset ethical fund will look quite different from a mainstream fund. Faced with low fixed income returns, alternatives have a bigger role.

SMSF strategies

Don't believe the SMSF statistics on investment allocation

The ATO's data on SMSF asset allocation is as much as 27 months out-of-date and categories such as cash and global investments are reported incorrectly. We should question the motives of some who quote the numbers.

Investment strategies

Highlights of reader tips for young investors

In this second part on the reader responses with advice to younger people, we have selected a dozen highlights, but there are so many quality contributions that a full list of comments is also attached.

Investment strategies

Four climate themes offer investors the next big thing

Climate-related companies will experience exponential growth driven by consumer demand and government action. Investors who identify the right companies will benefit from four themes which will last decades.

Investment strategies

Inflation remains transitory due to strong long-term trends

There is momentum to stop calling inflation 'transitory' but this overlooks deep-seated trends. A longer-term view will see companies like ARB, Reece, Macquarie Telecom and CSL more valuable in a decade.

Infrastructure

Infrastructure and the road to recovery

Infrastructure assets experienced varying fortunes during the pandemic, from less travel at airports to strong activity in communications. On the road to recovery, what role does infrastructure play in a portfolio?

Economy

The three prices that everyone should worry about

Among the myriad of numbers that bombard us every day, three prices matter greatly to the world economy. Recent changes in these prices help to understand the potential for a global recovery and interest rates.

Shares

Why green hydrogen is central to achieving net zero

Hundreds of green hydrogen projects show this energy opportunity is finally being taken seriously. While a cost disadvantage and technical challenges need to be overcome, it promises to deliver a path to net zero.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.