Passive Fund Providers Take an Active Approach to Investment Stewardship

The shift to index investing hasn't led to an abdication of stewardship responsibilities.

Hortense Bioy, CFA 21.12.2017
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This article is a summary of the findings from our research report “Passive Fund Providers Take an Active Approach to Investment Stewardship”. You can access the full report here.

As assets continue to flow from actively managed to index-tracking strategies, the largest index asset managers1 are becoming increasingly influential, often ranking among the largest investors of public companies. Despite this fact, little research has been done to understand how index managers carry out their investment stewardship responsibilities.

It is legitimate to assume that devoting resources to monitor investee companies is not as high a priority for an index manager as it is for an active manager. After all, index managers tend to compete on fees, and their overriding objective is to match the performance of indexes. But, unlike active managers, index managers can’t sell poorly run companies. They must either put up with poor governance or encourage positive change through voting and engagement. The former is not an option. These managers have a fiduciary duty to their investors to push for changes that will increase shareholder value. As large, permanent owners of a wide swath of public firms, they have the clout to advance their agendas. Being active owners is also a means for these managers to galvanize their reputation as investor advocates.

To better understand the stewardship activities of index managers, we surveyed the largest providers of index funds and exchange-traded funds—12 in total—across three regions, the U.S., Europe, and Asia. These include not only global asset managers such as BlackRock and Vanguard but also smaller firms that are key passive fund providers in their local markets, such as Schwab and Lyxor. Most of the surveyed firms also operate an active fund business that in some cases is much larger than their passive one. Collectively, the firms surveyed have over US$20 trillion of assets under management.

In this paper, we share our findings and highlight what managers have in common and areas where they differ. We also provide a list of best practices that investors can use to assess how asset managers stack up.

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Key Findings

  • The shift to index investing hasn’t led to an abdication of stewardship responsibilities. On the contrary, index managers like BlackRock, Vanguard, and SSGA are increasingly taking an active role in the oversight of investee companies. That said, we observed a range of stewardship practices among index managers based on their scale, predominant investment style (passive or active), philosophy, region, and history.
  • The data we have captured indicates that index managers are increasingly committed to using the tools at their disposal—proxy voting and engagement—to improve environmental, social, and governance activities of their holdings. This has coincided with increasing demands from investors for more focus on responsible investment and increased pressure from regulators to exercise strong corporate oversight.
  • Nearly all the firms we surveyed apply the same principles to all their holdings irrespective of whether they are in active or passive portfolios. Consolidating all holdings for voting and engagement allows asset managers to leverage their full scale.
  • All but one of the surveyed firms indicated they were stepping up engagement efforts, despite the associated costs, the difficult-to-quantify prospective benefits, and the fact that any fruits from these efforts are bound to be shared with competitors. Schwab was the only firm to indicate that it has no plans to carry out company-engagement activities.
  • Index managers, especially in the U.S. and Japan, appear increasingly willing to voice concerns, and in some cases directly challenge corporate management, like European managers have tended to do for years, notably in areas such as board composition and climate risk.
  • Investor scrutiny of stewardship practices is intensifying. While voting and engagement disclosure is improving, more can be done. Enhancing transparency and communication will improve public awareness and understanding of index managers’ stewardship activities.


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1 Throughout the study, we use the term “index managers” to refer to asset managers who provide index-tracking investments, including traditional index funds, ETFs, and segregated mandates.

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About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  Hortense Bioy, CFA, is Director of passive fund research for Morningstar Europe.

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