As assets continue to flow from actively managed to index-tracking strategies, the largest index asset managers  are becoming increasingly influential, often ranking among the largest investors of public companies. Despite this fact, little research has been done to understand how index managers carry out their investment stewardship responsibilities.
It is legitimate to assume that devoting resources to monitor investee companies is not as high a priority for an index manager as it is for an active manager. After all, index managers tend to compete on fees, and their overriding objective is to match the performance of indexes. But unlike active managers, index managers can't sell poorly run companies. They must either put up with poor governance or encourage positive change through voting and engagement. The former is not an option. These managers have a fiduciary duty to their investors to push for changes that will increase shareholder value. As large, permanent owners of a wide swath of public firms, they have the clout to advance their agendas. Being an active owner is also a means of galvanizing managers' reputations as investor advocates.
To better understand the stewardship activities of index managers, we surveyed the largest providers of index funds and exchange-traded funds--12 in total--across three regions, the United States, Europe, and Asia. These include not only global asset managers such as BlackRock
and Vanguard but also smaller firms that are key passive fund providers in their local markets, such as Schwab
and Lyxor. Most of the surveyed firms also operate an active fund business that in some cases is much larger than their passive one. Collectively, the firms surveyed have over $20 trillion of assets under management.
Our research shows that the shift to index investing hasn't led to an abdication of stewardship responsibilities. The world's largest index managers have expanded their stewardship or corporate-governance teams and, based on the data we have collected, are increasingly committed to improving the environmental, social, and governance practices of their holdings through proxy voting and engagement.
Large asset owners have led the push for increased oversight, as more believe that ESG integration and active ownership practices--through voting and engagement--can have a positive impact on investment performance. Regulators have contributed further with the adoption of stewardship codes in several countries, including the United Kingdom, Switzerland, and Japan.
Another factor fueling the change in behavior among index managers is the tremendous growth of the assets they manage. Assets in traditional index funds and ETFs have grown fourfold since the financial crisis and now account for close to one fourth of total fund assets globally, according to Morningstar data.
Perhaps the single most compelling piece of evidence of the increased commitment to active ownership practices among index managers is the growth of their investment stewardship teams. For example, BlackRock expanded its team from 20 members in 2014 to 33 today; Vanguard's team went from 10 in 2015 to 21; and UBS
will employ 11 professionals dedicated to stewardship by the end of 2017, up from four in 2015. These increases will allow the firms to undertake more and better-quality engagements with investee companies.
The role of index managers as active owners is more important in that they are the ultimate long-term shareholders of listed companies. Unlike active portfolio managers, index managers can't sell poorly run companies. Thus, they must encourage positive change through voting and engagement.
That said, one shouldn't assume that all index managers undertake stewardship activities in the same way. From the responses to our survey and our interactions with the firms, it is clear that voting and engagement activities vary significantly--not just according to the size and predominant investment style (passive or active), but also according to the philosophy, region, and history of the asset managers.
Below, we share our findings and highlight what managers have in common and areas where they differ.
Voting Behavior Is Changing
We found that firms that offer both actively managed and index-tracking strategies apply their voting policies universally to all portfolios, irrespective of investment style. The only exception was Fidelity, which delegates the full management and voting responsibilities of its index funds to subadvisor Geode. Therefore, Geode's proxy voting policy and activities are separate from Fidelity's. In our view, this setup has the disadvantage of duplicating efforts and limiting the benefits of scale with respect to proxy voting.
Meanwhile, the scope of voting varies widely across asset managers, depending primarily on their size. Large managers with a global reach, such as BlackRock and Vanguard, typically vote for all portfolio holdings where possible as long as the potential benefit of voting outweighs the cost of exercising the right. By contrast, smaller firms and those with fewer resources, such as Deutsche Asset Management and Lyxor, focus more on their home country or region, or on their largest holdings. For example, Deutsche AM works with a "watchlist" of around 700 companies that typically represent around 50% of its equity fund assets under management.
The starting position for all surveyed asset managers is to be supportive of company management and boards, as most votes are linked to routine administrative matters. However, as voting records show, there are significant differences among firms in how they voted, especially with respect to voting against management.
We're starting to see anecdotal evidence of mounting dissent. This is particularly so in the case of U.S. asset managers, who relative to their European counterparts have been historically more reluctant to challenge the status quo, especially in relation to environmental and social issues.
One recent high-profile case was Exxon Mobil
. BlackRock and Vanguard supported a shareholder proposal seeking greater disclosure of climate-related risks, against the Exxon board's recommendation. This was the first climate-risk disclosure resolution Vanguard had ever supported. Other asset managers, including State Street Global Advisors (
SSgA), Amundi, and Legal & General Investment Management (LGIM), had already voted in favor of the proposal in 2016.
SSgA also made headlines recently after its opposition to the re-election of directors at 400 companies for failing to appoint more female board members.
Meanwhile, in a sign that change is coming to Japanese corporate culture, Japanese asset managers are now also opposing company management more. For example, after the adoption of more-stringent voting criteria in areas such as the election of directors, the number of Nikko's votes against management doubled in two years, reaching 17% in 2017.
Despite a general sense that asset managers may be increasingly open to using negative votes, key differences remain in the way these votes are deployed. For some, voting against management remains a last-resort option. For example, BlackRock will first try to effect change by engaging management teams and will only cast a negative vote if management is unresponsive or takes too long to address BlackRock's concerns. At the other end of the spectrum, Europe's largest asset manager, Amundi, has a strict voting policy and does not hesitate to swiftly vote against management when a proposed resolution fails to comply with its principles.
Another noteworthy difference among the surveyed firms lies in the varying level of authority that active portfolio managers have in voting decisions. For example, at BlackRock, Amundi, and UBS, the policy is for active fund managers to vote consistently across all funds, but they retain the authority to vote differently from the house view. This contrasts with the approach adopted at Vanguard, SSgA, and LGIM, where the corporate-governance teams have ultimate authority on the final votes. This is to ensure consistency and efficacy, as well as to minimize potential conflicts of interest.
Index portfolio managers, meanwhile, have no say in the voting of their portfolio holdings. Index portfolio management is a highly automated process where delivering the index performance is the overriding mandate. That said, index portfolio managers can be consulted in some organizations for policy-level decisions and informed of certain votes.