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Passive strategies 'weaken' stewardship
11 August 2014
Active manager Threadneedle warns that large-scale move to passive management could negatively impact local authorities’ ownership mindset
Investments has warned of the risks to stewardship associated
with compelling local authority funds into a large-scale move
to passive investment, in its response to the UK government's
consultation on collaboration and cost savings for the Local
Government Pensions Scheme (LGPS) in July 2014.
The active management firm considered a large scale move to
passive management a risk that would weaken the ownership
mind-set of local authorities and their ability to exercise
real stewardship, systematically and effectively.
also suggested that local authorities were likely to counter
their ability to protect their own capital by aiming to avoid
potentially value destructive strategies, such as certain
merger and acquisition pursuits.
"There are important corporate governance considerations.
Large, passive portfolios are more difficult, and more costly,
to monitor, particularly when it comes to the
resource-intensive engagement between institutional investors
and company boards that is expected under the UK Stewardship
Code," said Moira Gorman, local authority client director at
"Active managers play an important role in the overall economy
by actively intervening as stewards of investors' capital."
also covered weighting risks it perceived inherent passive
management, the value of active research and corporate
governance considerations and the importance of active
The firm said that most passive equity strategies track indices
that are market cap weighted, and therefore skewed towards
large cap companies. It also argued that high quality company
and security research is essential to successful and risk-aware
asset management in both equities and fixed income, and should
be the key factor in constructing portfolios that can deliver
the desired risk-adjusted returns.
is an active skill to investing in bonds that judges the
ability and willingness of issuers to repay debt, and where
yields compensate for the underlying risk. Passive managers are
ambivalent to this," said Gorman.
"Passive management is not a low cost panacea; it is one tool
in an expansive kit that is available to pension funds to
enable them to achieve their long-term objectives of deficit
recovery and the payment of liabilities as they fall due," said
Campbell Fleming, CEO of Threadneedle Investments.