• Passive funds taking more active approach toward companies they own
• BlackRock, Vanguard clearest examples of this trend, Morningstar says
BlackRock Inc. and Vanguard Group are the clearest examples of passive investing giants’ shift toward more active oversight of the companies they own, according to a first-of-its-kind study by investment researcher Morningstar Inc.
These two firms showed the most growth since 2014 in the total times that they've met with companies to voice their concerns on issues ranging from executive pay to climate change. BlackRock and Vanguard also have the biggest teams dedicated to such engagement among the 12 providers of index-tracking investments that Morningstar surveyed across the U.S., Europe, and Asia.
“If you look at the growth in the number of people on those teams, they've both come a long way,” said Alex Bryan, who directs Morningstar's passive strategies research for North America. Vanguard's team more than doubled from 10 members to 21 while BlackRock's rose from 20 to 33.
They aren't the only ones beefing up their stewardship role as investments in index funds and exchange-traded funds have climbed from $1.8 trillion globally a decade ago to $8.1 trillion today. Other asset managers, including the investment arm of State Street Corp., are also increasingly vocal on topics like getting more women onto corporate boards.
Morningstar's Dec. 6 report, which Bryan described as the first to quantify this oversight trend, said it makes
sense since, unlike active managers, passive managers that follow a benchmark can't
“vote with their feet” by selling a company's stock. Many index managers are among
the largest shareholders in the companies they own, which gives them more clout for
BlackRock and Vanguard, along with Fidelity Investments, still remain the index managers most likely to side with companies in a vote, according to their own voting records.
Bryan said that's partly because most votes are on routine matters, like approving the company's accountant or electing its directors. There's also a reluctance to vote against corporate management if asset managers believe they can effect change behind the scenes instead, he said.
All but one of the firms studied, which together manage more than $20 trillion in assets, told Morningstar they're stepping up their engagement efforts. Charles Schwab & Co., which doesn't engage with any of its portfolio companies now and doesn't plan to, said there isn't enough evidence on its benefits to investors to justify the expense.
“They're clearly the outlier here,” Bryan told Bloomberg Law. Schwab, however, did show a willingness to wield its votes. It reported the highest rate of voting against management of the five U.S.-based asset managers analyzed.
“You can look at every vote,” Bryan said, because fund managers are required to report them in the U.S. “But you can't do the same for engagements.” So Morningstar is calling for more disclosure on how asset managers interact with companies in their portfolios. BlackRock, for one, is already experimenting with more transparency in its voting record.
Morningstar also made a list of best practices that investors can use to see how asset managers stack up.
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