Active ownership is not only critical for investors to ensure portfolio companies have sound corporate and sustainability governance, but when carried out appropriately and with consistency, it also has strong diversification merits, the Investment Magazine Fiduciary Investors Symposium has heard.
Senior portfolio manager at the $300 billion Australian Retirement trust, Peter Barany, said an informed “interventional stance” is beneficial for adding value and could help create an edge in an equity portfolio.
“Active management in equities is a tough game,” he told the symposium in Healesville, Victoria.
“Value [investing] has been really tough, tougher than active management in general.
“If you’ve got that activist lever that you can pull that can help you add value, it can actually be a really good diversifier in your multi-manager portfolio as well, if you’ve got the stones to invest in a portfolio of like eight to 10 stocks where you know the trajectory might take a long time to play up.”
ART owns equities in around 400 domestic companies and its internal stewardship team has a direct engagement list of approximately 25 names – these could be companies where ART has large holdings in or where there is an assessed materiality against ART’s key ESG themes.
Barany said ART is looking to engage with companies on a more “whole-of-business” basis. This means taking more of an asset management perspective, knowing the portfolio companies better, and ensuring that they are maximising their financial performance.
“I hate hearing [the question of] ‘what are your challenges of investing domestically?’,” Barany said.
“I don’t actually see it as a challenge. I see it as an opportunity.
“We are growing on the registers of these companies, so the consideration for us is to become a more sophisticated participant in capital markets domestically at first.”
Eyes wide open
The discussion about active ownership came as WiseTech, one of the largest and best-performing Australian listed stocks this year, saw its share price nosedive in recent weeks after controversies enshrouded the company. The root cause was a series of allegations that WiseTech founder Richard White had offered several women houses and investments in their businesses in exchange for sex.
WiseTech is an important part of the Australian equity market, and Barany said ART owns the company through both active and passive exposures, and that the fund has had a series of engagements with the company, although it wasn’t on the fund’s priority list.
White stood down as WiseTech director and CEO on 24 October, and the company said in an ASX announcement that he will take a short leave and transition into a new capacity as “founder and founding CEO”. White still owns 34 per cent of WiseTech.
“[White] was never going to risk cede control. It’s his business. He views it as that,” said Perpetual head of Australian equities Vince Pezzullo. He said the fund manager doesn’t invest in WiseTech.
“Unfortunately, you’ve got to go in with eyes wide open. If you go on the register [as a minority shareholder], you know that he runs the business, and whether he’s there or not, he’s still running the business. And you just got to accept that there is certain risks with that.”
When it comes to good board composition, Pezzullo said a diversity of opinions and skills is the most desirable quality. Some founder-led companies actually excel in this aspect, as the founders want themselves to be held to account and will avoid having a passive, more traditional board, he said.
“Companies that have performed badly, typically it starts at the top. It starts with a board which is probably not aligned correctly, or they’ve got the wrong talent,” Pezzullo said.
“I hate to say [but] I’ve got an accounting background – you don’t need too many accountants on a board. Because accountants and particularly lawyers, they like reducing risk at all costs.
“You need an ability, a business acumen, to take calculated risk, and to ask the hard questions. So there’s no cookie-cutter outcome here, it’s very different depending on the type of businesses you’re dealing with.”
While big investors have more influence over company boards, JANA chief executive Georgina Dudley said it doesn’t mean issues like the WiseTech scandal aren’t important for smaller shareholders or smaller super funds.
“If you’re a $30 billion rather than a $300 billion [fund], the reasons for doing this are going to be different, and how you go about doing it are going to be different – in terms of how you prioritise it,” Dudley said.
“Our general advice to funds is to really start and prioritise the areas that the risks are going to cost you money in the short term.
“Big cultural activities that are going on that can have a really big short-term impact on share prices, those are the types of things worth engaging and having an active position in.”
Note: this article was edited on 7 November to clarify ART’s stewardship approach.
