Merryn's Blog

Why it's time to write to your fund manager

Companies are only able to shirk their social responsibilities because, as shareholders, we let them. Here's what we should do about it.

There aren't many fund management companies that both endlessly engage with companies that they invest in and report their efforts to their investors. First State does.

That makes their comments on everything from executive pay to the morality of the trading background worth reading. I'm currently skimming through their Sustainability Report for 2012. Some of it makes depressing reading. Why? Because it spells out how over the last 20 years "any search to strengthen and nuture fiduciary duty, stewardship or social purpose has been overtaken in the scramble for short-term profits".

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Take the mean duration of the stock-holding period of US investors. In 1940, it wasseven years. It stayedseven years for the next 35 years; then it fell. By 1987, it wastwo years. By 2000, it was below one year. By 2007, as high-frequency trading kicked off properly, it had fallen toseven months.

There is a similar pattern in the UK and in China (where it is about six months). This isn't good. That's partly because we know that high turnover is one of the main predictors of bad performance (it increases costs and eats away at returns). But it is also because short-term holders of stocks don't care about companies: they only care about stock prices - and that is one of the things that has brought us to where we are today (a world of stock options, buy backsand extreme management pay).

Advertisement
Advertisement - Article continues below

So what can be done about this? I've written about the various elements of this a good deal here. But the key, beyond regulation, is for private investors to do two things: to engage with the companies they invest in (via voting and writing), and to let the fund management industry know what matters to them low turnover is better then high turnover, getting angry about high pay for no performance is better than not bothering to vote at AGMs and keeping an eye on the general behaviour of companies is no longer anoptional extra.

With this in mind, we return to First State and its list of engagements. There is, says First State, no such thing as "the perfect company in which we can invest our clients' and our own capital." But it is the trend that matters. "We engage with companies on environmental, social and governance issues (ESG) for two reasons.

First, because we have a responsibility as part owners in the business to address any ESG issues that arise. Second, because if we can help to address these issues satisfactorily over time, we are able to add value and reduce risk in our portfolios."

Makes sense. So why doesn't everyone do it as methodically as First State seems too? Let's all write to our fund managers and ask.

Advertisement

Recommended

Visit/504054/the-power-of-mean-reversion
Funds

The power of mean reversion

When it comes to investing in funds, don’t chase the top performers – look for the cheapest ones.
1 Apr 2019
Visit/503809/investing-in-funds-the-most-important-number-to-look-at-before-you-buy
Funds

The most important number to look at before you buy any fund

Many investors get distracted by past performance when they buy a fund. But there’s something else to consider that will have a much bigger influence …
22 Mar 2019
Visit/investments/funds/investment-trusts/600757/why-investment-trusts-are-the-best-vehicle-for-your
Sponsored

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020
Visit/investments/stocks-and-shares/share-tips/600790/asian-income-stocks-where-to-find-the-continents
Share tips

Asian income stocks: where to find the continent's top money machines

International dividends shouldn’t only mean companies in the US or Europe – the Far East has plenty of big payouts to offer. Cris Sholto Heaton looks …
6 Feb 2020

Most Popular

Visit/economy/inflation/600799/federal-reserve-inflation-money-printing
Inflation

Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/investments/investment-strategy/600772/just-five-assets-matter-for-investors-portfolio-asset-allocation
Investment strategy

Just five assets matter for investors. Here's what they are

Every investor’s needs are different – but most can be met by the right combination of five investments
11 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020