At the same time given the fact that index funds have to keep buying these shares as part of their tracking process, there has long been the perception that they have no power when it comes to corporate governance issues. Indeed if they do, can promoting good behaviour really make a difference to the end performance an investor gets back
Or could it be that we are looking at this the wrong way around? Yes active managers can sell out when things get rough or near the bottom (after the event) but will this ultimately lead to any changes in behaviour of the company they are ditching? By being forced long-term holders the interests of index funds and the companies they track is very much aligned and as such the best way of improving returns is to employ active ownership to encourage best practice in management.
The main question is how does doing this benefit the end investor in the pocket, not just in the feel good stakes?
To illustrate the power of active ownership in action look at what happened with the house building company Redrow. In 2012 the chairman and founder of the business tried to buyout the company at a price which LGIM and other shareholders felt did not reflect its true long-term value. As such we fought against it at the time of takeover and then after by voting against the re-election of the deputy chairman owing to our concerns regarding the representation of minority shareholders’ interests. The deputy chairman later stepped down and the share price has since trebled in value, adding significant value to the index funds it was held within.
Another example is the betting firm Betfair. Having floated at £13 in October 2010, a combination of poor results and unregulated market uncertainty led the shares to fall to £8 by August 2011. In August the following year a new CEO joined the business and set out a new strategy focusing on regulated markets and reducing costs. However in mid-2013 a private equity group and two major shareholders bid for the group, firstly for 880p and then 950p, a 35% premium. Our corporate governance team engaged with the company, giving the chairman and the board our backing to reject the offer and give the new management team time to pursue its newly outlined strategy. With the shares now trading at around 3300p (and a proposed merger with Paddy Power on the table) it would appear the said strategy proved to be a success.
At a time when it is increasingly difficult to differentiate between index funds we think investors do want to know that their managers are getting involved in such issues, especially when it can make such a difference to their pocket.
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