Ac­tively adding value We dis­cuss the pas­sive ver­sus ac­tive man­age­ment de­bate with Grant Pitt, joint head of in­sti­tu­tional client ser­vices at Al­lan Gray, and Pi­eter Koorn­hof, in­vest­ment an­a­lyst at Al­lan Gray.

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trend to­wards pas­sive man­age­ment – where in­vest­ment man­agers track mar­ket in­dices rather than pick in­di­vid­ual stocks – has caused some to ques­tion the mer­its of ac­tive man­age­ment. A com­par­i­son of these strate­gies is usu­ally con­fined to port­fo­lio con­struc­tion and cost; but there is another as­pect of ac­tive man­age­ment that is of­ten over­looked: share­holder ac­tivism, which in­cludes en­gag­ing with com­pany man­age­ment and vot­ing dur­ing share­holder meet­ings.

Pas­sive man­age­ment is an in­vest­ing strat­egy that tracks an in­dex or port­fo­lio. Ac­tive man­age­ment is the op­po­site; ac­tive man­agers ded­i­cate re­search ef­forts to analysing the in­trin­sic value of listed se­cu­ri­ties, buy­ing those they be­lieve are rel­a­tively cheap and avoid­ing those they be­lieve are ex­pen­sive, thus ac­tively con­struct­ing their port­fo­lios. But for Al­lan Gray, ac­tive man­age­ment does not end there.

“We take our role as stew­ards of our clients’ hard-earned sav­ings se­ri­ously and think that proac­tive en­gage­ment with the board and ex­ec­u­tives of com­pa­nies whose se­cu­ri­ties we have bought for our clients can re­sult in bet­ter in­vest­ment per­for­mance. These en­gage­ments can po­ten­tially shape a com­pany into a bet­ter and more sus­tain­able long-term fi­nan­cial prospect, which is likely to in­crease its val­u­a­tion,” ac­cord­ing to Grant Pitt, joint head of in­sti­tu­tional client ser­vices at Al­lan Gray and Pi­eter Koorn­hof, in­vest­ment an­a­lyst, Al­lan Gray.

Pas­sive man­agers, on the other hand, very rarely en­gage with the com­pa­nies in which they in­vest.

En­gage­ments with com­pa­nies

con­fer­ences, road shows and an­a­lyst days.

Pitt and Koorn­hof ex­plain that dur­ing these en­gage­ments var­i­ous mat­ters were dis­cussed, in­clud­ing en­vi­ron­men­tal, so­cial and gov­er­nance (ESG) and sus­tain­abil­ity is­sues.

“We be­lieve, if ne­glected, these is­sues may im­pact a com­pany’s long-term eco­nomic suc­cess. This is be­cause, over time, ir­re­spon­si­ble and un­sus­tain­able con­duct will weigh down on a com­pany’s earn­ings and there­fore its val­u­a­tion,” Pitt and Koorn­hof say.

They add that al­though Al­lan Gray al­ways strives to en­gage with com­pa­nies in a con­struc­tive man­ner, they are not afraid to chal­lenge man­age­ment if they think the cir­cum­stances war­rant a more force­ful ap­proach.

“Ac­tively en­gag­ing with man­age­ment and also as­sist­ing clients to ex­er­cise their right to vote are im­por­tant com­po­nents of the over­all ser­vice we pro­vide to our clients,” they ex­plain.

Al­lan Gray pro­vides vot­ing rec­om­men­da­tions for gen­eral meet­ings of com­pa­nies that have a ma­te­rial weight in its clients’ port­fo­lios and for smaller com­pa­nies in which its clients col­lec­tively hold a sig­nif­i­cant per­cent­age.

“We make vot­ing rec­om­men­da­tions that we be­lieve at the time to be in the best in­ter­ests of our clients. We dis­close these vot­ing rec­om­men­da­tions, to­gether with the out­come of the share­hold­ers’ vote on each rel­e­vant res­o­lu­tion, quar­terly on our web­site,” Pitt and Koorn­hof say.

Re­spon­si­ble in­vest­ing needs ac­tive man­age­ment

Re­spon­si­ble in­vest­ing is re­ceiv­ing in­creas­ing at­ten­tion: glob­ally, through the United Na­tions-sup­ported Prin­ci­ples for Re­spon­si­ble In­vest­ment (PRI) Ini­tia­tive, and in South Africa through the Code for Re­spon­si­ble In­vest­ing in South Africa (CRISA).

“This is pos­i­tive for in­vest­ment man­agers like us and our clients. There is no doubt that long-term sus­tain­able re­turns are de­pen­dent on sta­ble, well-func­tion­ing and well-gov­erned so­cial, en­vi­ron­men­tal and eco­nomic sys­tems,” they note.

Ef­fec­tive re­spon­si­ble in­vest­ing de­pends on ac­tive in­vest­ment re­search – to iden­tify is­sues to en­gage man­age­ment upon and to do so in­tel­li­gently – and on ac­tive in­vest­ment man­age­ment, which al­lows a man­ager not to own com­pa­nies that don’t deal with their ESG chal­lenges or that don’t re­spond to these is­sues.

“Since they rarely ad­dress these is­sues and are of­ten poorly re­sourced to do so, pas­sive in­vest­ment man­agers weaken share­hold­ers’ abil­ity to drive ESG is­sues with com­pany man­agers, to their clients’ long-term detri­ment,” Pitt and Koorn­hof con­clude.

Grant Pitt Joint head of in­sti­tu­tional client ser­vices at Al­lan Gray

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