Passive managers who fail to engage as active stewards on behalf of their fixed income assets, particularly those touting their own sustainability credentials, should be held to account by asset owners, according to Willis Towers Watson.This follows joint guidance recently published by the Pensions & Lifetime Savings Association (PLSA) and the Investor Forum encouraging pension schemes to sign up to the 2020 Stewardship Code and to challenge any asset managers who have not done so.
Many indexation managers now consider themselves as long-term stewards of their clients’ equity capital. However, a recent paper published by Willis Towers Watson, “The rights of perpetual creditors”, found that when asked, not one indexation manager regarded themselves as long-term stewards of fixed income capital.
Furthermore, they appeared to conduct little to no engagement with bond issuers that do not have listed equity.
Kate Hollis, Director, Manager Research at Willis Towers Watson, says: “We find this disappointing, given the considerable amounts of money in passive fixed income mandates, and also surprising, given the increasing number of ESG-tilted fixed income strategies. Additionally, some of these large managers make great efforts to tout their stewardship credentials.”
“Stewardship in fixed income is a position of significant influence, which most active fixed income managers have recognised for some time. Many have been improving their stewardship activities with borrowers, including sovereign and government-related issuers, although some houses are notably lagging peers in their efforts.”
Defined benefit pension plans approaching maturity are also selling return-seeking assets and reinvesting the proceeds into credit. At the moment, this means stewardship activity is likely to decrease as these schemes switch to fixed income, particularly if they invest in passive strategies or those with high exposure to issuers without listed equity.
“We recommend investors raise the issue of stewardship with managers before they invest in fixed income mandates and during regular update meetings to ensure the overall level of oversight and care is not diminished,” says Hollis.