Top 3 reasons fund managers should pass back the vote

Author: Charlie Barlow, VP Fund Manager Partnerships, Tumelo

Shareholders benefit from investing in companies in two ways. The first being the gains made from the company's financial performance, and the second being the right to vote on certain company matters beyond the scope of the directors' decision-making powers. 

When investing through a third-party fund manager, shareholders often pass on the fiduciary duty to vote on such matters. But in a world where asset owners are demanding deeper engagement, there are three compelling reasons why fund managers should pass the vote back to their underlying asset owners.

1. Stay ahead of anticipated regulation changes

Fund managers wield massive power. The 'big three' fund managers - BlackRock, Vanguard and State Street - cast approximately 23.5% of the votes at companies that make up the S&P500 (1) (a percentage anticipated to rise to 40.8% by the mid-2030s if recent trends continue). This makes them incredibly powerful actors when it comes to corporate governance – and from a regulator's perspective, too powerful.

Regulators in the US and UK are keen to address this potentially dangerous trend. While the rhetoric from regulators is that deeper engagement with underlying shareholders is a 'should' rather than a 'must' for fund managers today, there's recognition in the market that passing the vote back to underlying asset owners is the route of travel from a regulatory perspective.

In the UK, trade bodies have been supporting the idea of passing back the vote for some time: 

  • In September 2021, the Department for Work and Pensions (DWP) Voting Taskforce recommended that "all fund managers should voluntarily offer pooled fund investors the opportunity to set expressions of wish on request" (2). 
  • And in October 2022, the Financial Conduct Authority (FCA) supported this view, commenting that "there is no regulatory barrier to pension scheme trustees issuing an expression of wish to their asset managers, and no breach of fund rules where a fund manager takes the expression of wish into account when voting." (3).

Fund managers who act now can get ahead of anticipated regulatory changes and further demonstrate their commitment to deeper investor engagement to both existing and prospective clients.

 

2. Meet the demand of their underlying retail and institutional investors

In August 2021, Robinhood acquired Say Technologies, a shareholder engagement platform offering easy access to proxy votes and direct communication between investors. Robinhood acknowledged that providing access to voting was a great way to increase shareholder engagement, with their CEO commenting: "I think the world is moving in this direction because a lot of people are genuinely looking to have an impact with their investments,".

A recent report by Hymans Robertson featuring Tumelo voting data highlighted the demand for deeper engagement between asset owners and fund managers. The engagement rate was overwhelming based on data from >55,000 votes across 30 pension schemes. When asset owners indicate their voting preferences via the Tumelo platform, they can also articulate their reasoning, allowing for two-way communication between asset owners and fund managers. The comments feature has been hugely popular, with almost 1,000 comments sent to fund managers via Tumelo in the 2022 season alone, covering >90% of the proposals.

In January 2022, BlackRock became the first major fund manager to launch its voting platform, reacting to increasing regulatory pressures and demand from its investors. With $2.3 trillion of BlackRock's assets under management (AUM) now able to access their Voting Choice platform, early demand for the platform has surprised even the most ardent champions of voting democratisation, with $530billion of AUM already exercising their voting choice - a 23% uptake.

Anecdotal evidence based on my recent conversations with US and UK fund managers highlights the increasing demand for voting opinion or control across retail and institutional investors. One large US manager commented, "we are seeing demand for voting from a significant enough percentage of our global investor base that we must launch a voting solution by the end of 2022".

In a world where asset owners are becoming better informed and more aware of their investments' impact, there is no let-up in the demand pressure for passing the vote back to underlying asset owners.

 

3. Attract investors with different voting opinions

As highlighted in my recent piece "Striving to be Different", Environmental, Social and Governance (ESG) issues have become heavily politicised, particularly in the US market. A new wave of anti-ESG funds has emerged, such as Strive Asset Management's US Energy ETF, along with significant ESG kickback from various US states, such as Texas, that want fund managers to reject ESG's ideological agenda and prioritise returns instead.

In the UK, Tumelo's roundup of the 2022 voting season, "AGM season roundup #2", highlighted that the disparate views of shareholders have never been more apparent with several votes "too close to call," including a vote on ExxonMobil's climate proposal, passed by a slim 52% of votes in favour, and a Say on Pay vote at Coca-Cola which witnessed just 50.5% of votes in favour.

Fund managers who retain the voting rights on behalf of their underlying shareholders (both retail and institutional) are running a significant risk; they take a stance on a contentious AGM vote themselves and risk upsetting some of their clients. For a fund manager to appeal to all sides of the political spectrum, retain AUM and win new mandates - which is critical against reduced asset prices and fund-fee pressure - they need to de-risk and pass the voting choice back to asset owners.

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Tumelo is a global financial-tech business working with >140 fund managers, offering both Expression of Wish and Pass-Through Voting to fund managers' retail and institutional asset owners.

Register today for our upcoming webinar: Digital Expression of Wish and Pass-Through Voting platform supports Fund Managers in growing AUM

[JOIN THE WEBINAR]

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(1) Considering the Index Fund Voting Process - https://www.banking.senate.gov/imo/media/doc/Griffin%20Testimony%206-14-22.pdf

(2) Department for Work & Pensions, "The report of the Taskforce on Pension Scheme Voting Implementation: Recommendations to government, regulators and industry", September 2021 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1018751/taskforce-on-pension-scheme-voting-implementation.pdf

(3) Financial Conduct Authority, Letter to DWP TPSVI Actions https://www.fca.org.uk/publication/correspondence/letter-to-dwp-tpsvi-actions.pdf

(4) BlackRock empowers more investors with Voting Choice https://www.blackrock.com/corporate/about-us/investment-stewardship/blackrock-voting-choice

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