Have asset managers been absent landlords?

Does being stewards of their client’ capital demand a more active approach?

CAPE TOWN – When any investor hands their money over to an asset manager, their ultimate objective is to earn a good return. Different managers may use varying strategies to try to generate that return, but ultimately there is one objective that they should all share: to be responsible stewards of their clients’ capital.

In simple terms, that means not exposing it to undue levels of risk. And that is risk in its most genuine sense – the risk of irrecoverable loss.

There are many factors that might lead to such a loss, but more and more the investment world is appreciating that a great deal can be distilled into a simple question: are the businesses we are investing in sustainable?

When a business fails, losses are inevitable. Ask anyone who invested in African Bank. So the question of sustainability is crucial.

Largely this comes down to the business model. Is it relevant, is it making sustainable use of available resources, and is there room for growth?

But it also hinges on how the company interacts with its stakeholders – in other words, its levels of corporate governance. Is it transparent and does it act in a way that is conducive to building long-term relationships?

Asset managers that invest in companies on behalf of clients have a responsibility to scrutinise these issues. They need to satisfy themselves that the companies they invest in are acting in the best long-term interests of all stakeholders.

However, investors are starting to ask harder questions about how much their asset managers are actually doing. With issues such as the near-collapse of African Bank, the lending practices at Lewis, the recent revelations around Volkswagen cheating emissions tests and constant questions around executive pay, how energetically are asset managers engaging with the companies they invest in? And are they serious enough about the long term risks represented by environmental, social and governance (ESG) factors?

Jon Duncan, the head of sustainability research and engagement at the Old Mutual Investment Group, says that in the international market, a growing number of asset managers are appreciating how important this is. Many have established dedicated teams to research ESG issues at companies, measure their performance and engage with them where they feel it is warranted.

Old Mutual is pioneering this approach in South Africa, having set up its own in-house team to research and measure ESG performance and guide portfolio managers on proxy voting and company engagements. The point is not to be activists, but to build long term value.

“What we are doing is identifying potential risks that may detract from long term performance,” says Duncan. “So it’s in our interest to work with the management of those companies to deal with these issues. We are invested in these companies for good reason. We want them to succeed.”

He says that asset managers cannot simply assume that businesses will do the right thing. Sometimes businesses need to be guided by outside, independent voices, and asset managers have the influence to do that.

“It’s about looking at driving the long term sustainable growth of the South African economy,” Duncan says. “What does low carbon, resource efficient, socially inclusive economic growth look like, and how do you as an asset manager contribute to that?”

Essentially, it comes back to the question of sustainability. For shareholders to see long term
returns, companies need to act in a way that promotes their own long term growth rather than just maximising short-term profit.

“Our biggest focus is to ensure that what companies are doing aligns with shareholder interests,”
says Rob Lewenson, Old Mutual Investment Group’s ESG engagement manager. “In the broader context, it is about alignment.”

Importantly, this is not something that should be tackled outside of the usual investment process. It is part of examining the investment case for every company.

“We are one factor within the qualitative decision-making process,” Lewenson says. “We spend a lot of time with portfolio managers to understand their thesis, because ultimately it must make business sense.”

“Our view is that the practice of good governance is critical,” he says. “You can have all the frameworks you like but you need to have directors who do the right thing because it’s the right thing to do, and not simply because it’s a tick box exercise.”

Engaging with companies to improve governance is therefore also not a once-off. It takes building a relationship of trust, which ultimately has long term benefits for all parties.

“To get things to change at a corporate through engagement can take anything from one to three years, so you have to be long term in your investment focus,” Duncan says. “You have to be pretty convicted that doing this heavy lifting is going to drive lower risk returns for your clients.”

Given trends overseas, local asset managers are going to come under increasing pressure from clients to be more active in how they vote on company resolutions and how they measure and report on their engagements. Clients want to know that their interests are being protected, and want to see what steps their fund managers are taking.

The good news is that, largely, businesses respond favourably to these kinds of engagements. They appreciate having shareholders who have constructive, independent views on how to improve the business.

“We’ve come out of an era of absent landlordism in a sense,” says Duncan. “But actually there is a great willingness from the corporate community to hear what we have to say.”

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