WHEB Commentary

George Latham

Why share ownership is better than share rental


Today, Tuesday the 12th March, is Ownership Day, a new initiative from UK Sustainable Investment and Finance (UKSIF) to raise awareness of the benefits of active ownership strategies in investment management. We are supporters of Ownership Day, and hope it is successful in encouraging asset owners, including pension fund members and retail investors to ask their trustees, financial advisers and fund managers whether their portfolio is being actively managed.

‘Ownership’ is another term we now need to add to the lexicon that surrounds our industry, alongside Stewardship, Engagement and Shareholder Activism. At WHEB Asset Management we believe that to be successful long term investors on behalf of our clients, we also need to be effective stewards of our investments. We also aim to be transparent about our activities, for example making comprehensive disclosure of our voting and engagement activities, and were recognised last year in the FairPensions survey for our leadership in this area.

Over time, as the professional asset management industry has grown, and the ultimate owners of capital (the principal) has outsourced the function of investing to a professional intermediary (the agent), beneficiaries have become more and more divorced and distant from the companies and the real economy in which they invest. Money managers have become focused on delivering an increasingly narrow definition of investment return to prove their worth. Managing the principal-agent relationship is complex and difficult, so the task has become limited in many cases to a short term measure of financial return against a benchmark. As investment time horizons have shortened, the principal investor has become more divorced from their investments. As a consequence, the responsibility and exercise of ownership, has become regarded by many professional money managers as an administrative burden that has nothing to do with the core business of ‘making money’.

It has always been our objective to try to swim against this trend, with a starting point of taking a longer term approach to both our investments and to our relationships with our own clients. We believe that a longer term perspective (and a consequent longer average holding period) enables investors to make reasoned and researched investments, rather than simply undertake trades, which in our view are closer to speculation. With that starting point in mind, it is much easier to see effective stewardship as an important contributor to better management of the long term risk-reward profile of our client’s assets. This is the case for two key reasons.

First, by exercising proper stewardship, investors can send clear signals to companies both specifically one-to-one and at a market-wide level through is said publically, and thereby influence corporate behaviour in a positive way. This doesn’t just mean companies that operate more in the interests of society, but also outcomes are more favourable to shareholders. To the extent that we can encourage more robust corporate governance and better management of long term risks, investors will be prepared to pay a lower risk premium, and therefore a higher valuation for investments. A concern here is that, although a few managers may make the investment in better stewardship, to the extent that we are able positively to influence behaviour, other investors can free-ride, benefitting whether they have been active or not.

The second reason, however, is more self-interested for our clients. In our experience, exercising good stewardship leads to richer conversations with companies we meet. We learn more about the quality of the management team, and we believe that we gain a better understanding of their likelihood of success. We believe this gives us an insight into the company’s valuation and provides us with a ‘competitive edge’ in a way that improves the risk-return profile of our portfolios. The fact that effective Ownership is not yet common in the investment industry is therefore perversely good for our relative return. However, the potential benefits to our client’s absolute return from raising standards across the market makes us pleased to support the first Ownership Day and wish UKSIF every success.

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