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Index Managers Actively Approach Investment Stewardship

Hortense Bioy 


The rise of index investing has raised questions about corporate governance and how far index managers will go to ensure that the companies they hold are acting in investors’ best interests.

One could easily assume that devoting resources to monitoring investee companies is not as high a priority for index managers as it is for active managers. After all, index managers tend to compete on fees, and their overriding objective is to match the performance of indexes.

So to better understand the investment stewardship activities of index managers, we surveyed 12 providers of index funds and exchange-traded funds globally. These included the largest providers in the U.S., such as BlackRock, Vanguard, State Street, Fidelity and Schwab.

How investment stewardship has expanded among index managers

Our research shows that the rise of index investing hasn’t led to an abdication of stewardship responsibilities. Instead, we found it’s quite the contrary.

The world’s largest index managers have expanded their stewardship teams and appear increasingly committed to improving the environmental, social, and governance, or ESG, practices of their holdings through proxy voting and engagement. This has coincided with the growing focus on responsible investment and increased pressure on large institutional investors from regulators to provide strong corporate oversight.

How index managers approach investment stewardship

Voting records and high-profile cases show that index managers are increasingly willing to challenge corporate management—especially in Japan and, to a lesser extent, in the U.S.—like European managers have tended to do for years in such areas as board composition and climate change.

Index managers are also stepping up their engagement efforts. With the exception of Schwab, all the firms we surveyed plan to engage in more and better-quality dialogue with companies—despite the associated costs, the difficult-to-quantify prospective benefits, and the fact that the potential impact of these efforts would be shared with competitors.

This proactive approach to investment stewardship by the vast majority of the surveyed firms makes sense. That’s because unlike active managers, index managers can’t vote with their feet. Their funds must hold whatever stocks the underlying indexes and prudent portfolio management dictate, even stocks of poorly run companies. In that regard, they are the ultimate long-term investors.

Not all investment stewardship programs are equal

We observed a range of practices among index managers based not only on their size and predominant investment approach (passive or active), but also on their philosophy, region, and history.

In our paper, we examine what managers have in common and areas where they differ. We also provide a list of best practices that investors can use to assess how asset managers stack up.

As assets continue to flow into passively managed strategies and responsible investing becomes increasingly important, one can only expect the scrutiny of index managers’ stewardship activities to intensify.

While voting and engagement disclosure is improving, more can be done. It is now incumbent upon these managers to enhance transparency and communication to improve public awareness and understanding of their activities. At Morningstar, we will be monitoring these developments.

Read the full research paper “Passive Fund Providers Take an Active Approach to Investment Stewardship”

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