A new breed of passive manager that conducts greater engagement with companies to create long term value is set to emerge as the scope for large investors to gain access to skilled managers decreases.
The US$ 4.77 trillion fund manager BlackRock has already started down this path in the belief that long term financial and societal benefits are best achieved when capital owners are engaged with companies, ensuring risks in areas such as governance are mitigated.
In April, Larry Fink, chief executive of BlackRock, sent an open letter to the chief executives of leading US companies encouraging them to do the same.
“The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” Fink wrote.
Speaking at the Conexus Financial Fiduciary Investors’ Symposium on May 13, Saker Nusseibeh, chief executive of activist manager, Hermes Investment Management, said he agreed with Fink’s view of markets, but that if BlackRock truly started to engage with the companies it is investing in, then it would need to hire more analysts.
Additionally, BlackRock would have to hire senior engagers who will be able to participate with the companies – a process which would raise their fees.
“If you are investing in index fund because they are cheap you are in for a shock as they are going to have to get expensive,” he said. “We know because we already have this type of service, but we do it for different reasons than BlackRock.”
As such he believes beta strategies are currently under-priced, as there is a need to discuss with companies the effects they have on society.
“The owners of the capital pool are the controllers of the world economy and the impacts of the decisions you make echo. They echo through time and they echo through society.
“You have to ask the question: Are we creating a society where retirees might have an extra $5000 on a stochastic modelling, but actually the price of energy is higher, the price of health is higher? And it’s grim, it’s Gotham city.
“Or would retirees rather have something lower and not have Gotham City?”
He gave the example of Lloyds, a UK bank which, as part of its efforts to improve its return on investment, is planning to close branches.
Nusseibeh said, if the average retiree in the UK cannot afford to run a car and if Lloyds went through with the plan, the average retiree would find it harder to make it to the bank.
He questioned whether it was the right decision for the agents of asset owners to tell the bank to increase its returns by 1 percentage point, increasing the share price by 5 pence, but ultimately hitting the membership of the funds they represent.