How Active Can Institutional Investors Be?
Institutional investors increasingly commit to actively monitor the companies they invest in. Yet quantitative evidence on the nature, extent, and impact of “stewardship” is more elusive since most of the interactions between institutional investors and their portfolio companies are private and therefore unobservable. As a result, there is little direct evidence on the extent of stewardship involvement, beyond self-selected case studies or from reading stewardship reports.
This project is a clinical study of a large, active U.K. asset manager, Standard Life Investments (SLI), between 2007 and 2015. SLI subsequently merged with Aberdeen Asset Management 2017 and became Aberdeen Standard Investments (ASI). The researchers had unprecedented access to the internal records of the UK equities team comprised of fund managers, internal sector analysts and the dedicated governance and stewardship (G&S) team. After two years of work and with the assistance of ASI staff, the researchers have assembled a structured data platform that covers a wide range of the internal day-to-day activities of the various participants inside the asset management organization. It combines proprietary data on fund holdings in UK stocks, records of company meetings, G&S alerts, internal analyst recommendations, internal reports and voting decisions and further public data from FTSE, Manifest (Minerva), ISS, BoardEx, Activist Insight, Factiva, and others.
The analysis shows a significant amount of monitoring and engagement activity. During the sample period the UK equities team met with approximately 350 portfolio companies over 1000 times a year. The results show that engagement is correlated with trading decisions, where disagreement between the asset manager and portfolio firms leads to sales of stakes. Disagreement is manifested in voting decisions against management of target firms, changes in internal sector analyst recommendations, and exit. Monitoring and engagement by the active asset manager produce information the fund managers can use to inform its trading decisions, which in turn contributes to alpha. The results provide evidence of a link between voice and exit, and ultimately performance.
Questions about this project should be directed to the authors:
Prof. Marco Becht
Professor of Finance
Solvay Brussels School
Prof. Julian Franks
Professor of Finance
London Business School
Prof. Hannes Wagner
* Winner of the Best Paper Award at the 2019 Drexel Corporate Governance Conference (sponsored by WRDS) 2019 : https://www.lebow.drexel.edu/event/2019/04/12/2019-corporate-governance-conference