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.
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