Fund firms fret over investor activism - survey

LONDON Mon Jul 26, 2010 5:50am BST

A shoppers carries a Marks and Spencer bag on Oxford Street in London May 25, 2010. REUTERS/Luke MacGregor

A shoppers carries a Marks and Spencer bag on Oxford Street in London May 25, 2010.

Credit: Reuters/Luke MacGregor

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LONDON (Reuters) - Asset managers say expectations that they can bring Britain's largest companies to heel through engagement with their directors is unrealistic.

A survey by the Investment Management Association (IMA) of 75 asset managers who, between them, manage 3 trillion pounds in Britain, found managers recognised the need for active engagement but worried that hopes were too high for their prospects.

One key factor which might dampen fund managers' ability to hold boards to account has emerged as UK pension funds diversify away from UK equities. That means asset managers now own a smaller proportion of UK companies, diluting their influence.

"The wider trend is for investors to diversify away from UK equities to global holdings," Jonathan Lipkin, head of research at the IMA, told Reuters. "Although many of our members are committed to improving engagement outcomes, they want to ensure there is a realism about what they can achieve."

He also cited obstacles such as the responsiveness of company boards -- index managers cannot simply sell up if boards choose to ignore them.

In the aftermath of the financial crisis institutional investors were criticised for not doing more to bring banks to account. This led to some soul-searching amongst fund firms and the development of the Stewardship Code, but recent votes have revealed the limitations of shareholder power.

For example, both M&S and Tesco have recently seen off investor protests over executive pay, despite some prominent criticism.

Respondents to the IMA's survey, published on Monday, said they rarely held a significant enough stake to make a difference in key votes, and expressed concerns about the continued lack of clarity around concert party actions.

The IMA suggested that if ownership of UK companies continues to be diluted at the current rate, a majority of UK shares will be overseas-owned by 2020.

The survey, conducted between February and April 2010, found that alongside the move out of equities, pension funds have stepped up their focus on liabilities.

Liability-driven investment (LDI) strategies, which seek to match returns with long-term pension payment obligations, grew by over a third in 2009 to some 175 billion pounds, representing 18 percent of corporate pension fund assets.

Lipkin said this was not purely UK pension fund money but instead reflected the amount of funds managed in LDI strategies in the UK by IMA members.

"The Dutch market has moved considerably towards LDI already. In the UK this is the deepening of a longer-term trend that began when defined benefit schemes were hit by a perfect storm in the late 1990s," he said.

Increasing longevity, taxation changes and other pressures have made it harder for defined benefit schemes to make payments to their retired members.

(Editing by Greg Mahlich)

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