How does pass-through voting work?
Pass-through voting allows an investor in a pooled fund to vote the shares in proportion to the AUM they have invested. The voting rights remain with the fund since the shares are in their name; therefore, votes are executed as a “split” or “partial” vote at the company AGM.
The pass-through voting process creates a more flexible solution which allows investors to separate voting strategy from investment strategy. Fund managers can transition existing funds or launch new funds to provide pass-through-voting functionality.
This is already achievable with a segregated mandate (where funds are not pooled but separated at the point of investment), however, this comes with operational expense for the fund manager as well as higher custodial fees for the investor. The lower fees and operational efficiencies make pass-through voting within pooled funds a more attractive and accessible option.
That said, pass-through voting comes with regulatory challenges in different jurisdictions, and requires careful consideration of the fund manager’s fiduciary duty.
The technical challenges of scale compound this: funds can hold thousands of companies and so, in theory, must send voting information to hundreds of thousands of investors. With the future of shareholder democracy at stake, careful consideration and conscientious implementation of pass-through voting is critical.
How it works for the investor
Pass-through voting offers the investor – institutional or retail – a choice over how their “underlying” vote is managed. With pass-through voting the investor can:
1. Select a voting policy from a proxy advisor that aligns with their stewardship policy. They will receive voting recommendations from the proxy advisor in line with the voting policy they have selected. They can apply this policy to all proposals, uninterrupted, or they can opt-in to override the policy where they have specific interest or opinion.
2. Set their fund manager as the default voter on all proposals, opting-in to override the fund manager’s decision where they have a specific interest or opinion. This process ensures that the investor is involved in the voting process – resulting in more effective stewardship.
How it works for the fund manager
The fund manager can create a pooled product that gives the investors in the fund a choice over how their shares are voted. They can choose to adopt the fund manager’s strategy or implement their own.
The fund manager maintains the legal vote as well as their fiduciary-duty obligations. As such, they must maintain oversight over which vote policies an investor can choose from. They also have the ability to override pass-through votes on issues that would materially affect the longterm performance of the fund.
In order to offer pass-through voting, the fund manager must adopt a solution that can identify the shareholders in their funds, or be willing to accept that burden of proof themselves.
For a deeper dive into pass-through voting, download Tumelo's white paper here.