"Active Responsible and Engagement Investment Approaches: Do they deliver positive returns?"

Last Tuesday evening I went to a seminar organised by the Pension Investment Academy and the University of Westminster Business School(Marylebone Campus) via the AMNT. The seminar was about whether responsible investment and engagement approaches actually work. Which is a pretty fundamental topic I posted on recently here.

Why I believe as a pension investor and trustee that investments should be made in a social responsible manner. I have to ask what empirical proof or evidence is there that such a policy actually achieves a positive return especially when compared to investments on behalf of those who don't worry what happens to their investments as long as they make money. 

I can remember being told many years ago that it is the duty of pension trustees to maximise the performance of their fund and nothing else. Which is clearly nonsense (then and now).

There was a pretty high powered panel of speakers from the Pension Protection Fund, Mercer, BT Pension fund and Henderson Global Investors.

The good news is that it seems that there is now research that engagement can add to returns and could reduce risk and volatility. However, the evidence is so far patchy. Certainly there is the argument that such active stewardship in Banks could make a "rerun" of the recent global banking disaster "materially less likely" (Walker Review 2009).

In the Q&A I did respond to the points made by some members of the panel that voluntary regulation is better than the state being involved, by saying that the lessons from the Banking crisis is that laissez faire capitalism failed and that you need more state regulation not less.

Also that until our investment advisers start advising trustees that it does make financial sense for the fund to be active then most trustees will not have the confidence to do so. Many fund managers (not all) in my experience see SRI as a unnecessary interference  in their right to manage money as they see fit. They simply pretend otherwise to win and keep business.  Regardless of the Stewardship Code you will need the support of your advisers to take them on.

Update: evidence on positive returns by Helene Winch from BTPF  here ; here; here and here 

Hat tip cartoon Kevin Wong

(I spent 3 years on a day release at the Westminster University site in the late 1990's to do a CIH post-graduate diploma. It was nice to be back but due to expansion and building works the campus is now unrecognisable).

Does Socially Responsible Investment really matter?

I think it does but twice now in recent weeks I have been in different meetings where Pension trustees (assets owners) have been urged to adopt responsible investment policies but I have been left wondering how seriously the financial services industry (as a whole) takes this issue? Or is this all just lip service?

Socially responsible investment (SRI) is not just about ethnical or green investment. Rather it is the belief that in the long term if you invest in companies that are well governedand act in a responsible way (i.e. no child labour, doesn’t destroy the environment, treat its workers well, doesn’t bribe public officials etc) then they will produce superior returns than companies who do not.

Nearly all large fund managers would claim to invest in a socially responsible way (and of course they would say this wouldn’t they!) yet many do little or nothing about it? Do they really just see RSI as a marketing tool to take in gullible pension trustees when privately they either think it makes no difference or even harms investment returns?

When you challenge them about this they blame us the pension trustees for not being interested in SRI and not making it a priority. Which if true would be a fair comment. But surely the reason why pension trustees don’t appear to be interested in RSI is that many of our professional investment advisors do not tell us that this is a key issue?

They may talk at length (rightly) about asset allocation and (wrongly) about the relative merits of particular fund managers and the latest “star performers” but little or nothing about SRI.

Trustees are very dependent upon professional advisers. Probably too dependent but that is another question. Yet until the professional advisers start making a real issue out of SRI and hammer home the benefits then you must assume that they don’t really believe it makes any difference to investment returns. So if they don’t think SRI matters then don’t be too surprised if the trustees don’t either.

Anti-trade union legal parasites touting for trade

I find it incredible that supposedly reputable solicitors are cold calling employers that are facing pension strike action next week, claiming that due to trivial balloting irregularities, they could claim damages against unions and that they can then discipline their staff. 

Now I can understand that if solicitors are contacted by their clients for advice they would have to give the appropriate legal guidance. Every employer knows that due to the anti-trade union laws in this country it makes it possible to challenge perfectly legitimate disputes. 

What we have here are solicitors who claim on their web site to be committed to always acting in a “Socially Responsible Manner” touting for fees. Exploiting procedures to try and discipline (and I assume) sack ordinary workers striking to save their pensions.

Apart from the morals or the ethics of trying to get people sacked for exercising their human right to withdraw their labour, you have to question the judgement of such people who think they can make a quick buck out of other people’s misery. When I look at their list of clients I recognise a number of employers who I know will be shocked at what they are trying to do.  I can only hope that they immediately review whether or not such people are fit and proper to advise them and that they take appropriate action. 

This doesn’t let the Labour Party off the hook either. You can argue the pros and cons of whether there is the right balance in legislation over industrial disputes (and you can guess my view) but what is indefensible and simply wrong is that the last government did little or nothing to stop minor and petty procedural issues being raised to stop legitimate action and to potentially sack people.

Faced with such disgusting behaviour motivated only by fat fees and commissions for already rich and highly paid people is it no wonder that so many young people despise our current political system.  They think that the injustice is such that it legitimises carrying out direct action and occupations.

Hedge fund trimmer

SIP IT

A few weeks ago I went to a “pitch” for pension business by the Hedge fund arm of a large international finance company. It was a confident and well delivered presentation. The “only” problem was that the fund managers failed to even consider Pension fund “Statement of Investment Principles” (SIP). 

By law each pension fund has to have a SIP. Many SIP's requires fund managers to put their money only in “socially responsible investments”. This is not just “tree hugging” but based on an important principle that investments in companies that do not for example exploit child labour, damage the environment treat their workers badly or bribe and corrupt local officials will produce superior investment returns. Fund managers also have to engage with companies and vote their shares. They need to have an audit trail that can prove what they are doing. 

Your typical hedge fund does none of this. No disclosure, no transparency and little regulation. Even if they had the will (which I doubt) to act in a socially responsible manner they could not even begin to explain how they could confirm with a decent SIP. Never mind how they could claim that they confirm with UN PRI (which is even more prescriptive than many SIP’s).

So, employer and employee trustees and all other representatives on pension’s scheme check your SIP and see how it deals with Socially Responsible investment. If it is no good then try and change it. If it is any good then ask all your fund managers (and prospective ones) how they apply it. It they can’t or won’t engage then sack ‘em.

(PC as always)