New frontier of asset manager activism in SA
According to the 2017 Willis Towers Watson Global 500 research report, total assets under management by the world’s largest 500 asset managers grew to $81.2-trillion in 2016. In this country, an estimated R4.6-trillion is managed by the savings and investment industry.
Obviously the people who control where this capital flows hold significant influence, which is the impetus behind the rise of asset manager activism. In this role, institutional investors have sought to influence the way companies they invest in operate as part of a broader strategy to generate better returns for clients.
However, the activist movement has now progressed beyond attempts to merely bolster investor value.
“Contemporary asset manager activism has broadened its focus to include social responsibility and ethics. This approach aims to build trust among a growing number of socially-conscious investors, while still delivering fair returns,” explains Sheldon Friedericksen, chief financial officer at FedGroup.
He believes asset managers can drive change based on the magnitude of the assets they manage. “This obviously gives them a significantly greater share of voice compared to individual investors.”
Accordingly, activist asset managers need a clear ethos and a values-based approach to guide their investment strategies. “This will dictate not only where they invest based on their values and principles, but will ensure they seek to uphold the interests of investors by guiding the corporate governance and ethics of the companies in which they invest,” says Friedericksen.
In addition to actively engaging with management at company AGMs and shareholder meetings, asset manager activists are also structuring portfolios that include companies that are making a material difference in the world.
“Motif Investing, for example, supports female empowerment by offering investors access to a custom portfolio of shares in women-led businesses,” he explains. Similar approaches are being adopted to improve the environment by investing in companies that reduce carbon emissions through renewable energy projects.
While this altruistic approach to investing is resonating with sociallyresponsible investors, particularly among millennials, founder and CEO of Sygnia Group, Magda Wierzycka, believes more can — and should — be done.
She says: “Despite these developments, many traditional institutional investors remain overwhelmingly passive, particularly with regard to highlighting instances of poor corporate governance, mismanagement and maladministration and, in a growing number of instances, blatant fraud and corruption.”
Wierzycka highlights the failures at African Bank, Steinhoff and VBS Bank, and the unfettered plundering of taxpayer money and state pension funds through state capture as examples of what can happen amidst an environment of asset manager apathy.
“The shareholders of many listed companies comprise mainly pension funds, which are represented by asset managers. This money belongs to South African savers, which means they are the de facto owners of the listed companies. Asset managers act on their behalf in a fiduciary capacity and therefore have a duty to not only invest with prudence, but to do so in an ethical and responsible manner. This should entail holding to account the boards and management of the companies they invest in.”
Yet, given the huge losses incurred by investors and savers in cases such as Steinhoff, it is clear even basic due diligence by asset managers has been largely absent.
“Despite clear signals and warning signs, such as opaque reporting, analysts and fund managers chose to rely on assurances and blindly accepted information from management to inform their investment decisions,” says Wierzycka. “Few within the industry have taken up the activist mantle to speak up against fraud, which has allowed it to flourish. This lack of adherence to basic ethics is what led to the current situation, where billions in investor value has been wiped out.”
While many institutional investors have pleaded ignorance in this regard, Wierzycka states that there are also those who knew what was happening and chose to enrich themselves with that knowledge, rather than take the ethical and responsible approach of reporting it to regulators and the relevant law enforcement authorities.
“While there’s nothing wrong with taking a position based on the identification of fundamental flaws in a business, when a fund manager stumbles across fraud their responsibilities are different. They need to protect the industry at large, rather than just look after their own interests and chase returns.”
Given the extent of fraud and corruption emerging from both the private and public sectors in SA, she believes this will be the new frontier of asset manager activism in this country.
“Asset managers have the power to drive change within society. The question is, who is willing to take bold action? Will those investors who claim to ascribe to the Crisa principles of ethical investing speak out, or do they merely pay it lip service as part of their marketing strategy? With an ever-growing number of corporate and stateowned enterprise scandals emerging, time will tell.”