James Moore: Funds have the power to stop malpractice

For managers to simply sell the shares of companies that misbehave is a copout
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The Independent Online

L&G's decision to take a tough line with the companies in which it invests is important because of its huge business running index tracker funds.

A tracker has to hold all the companies in the index. It can't pick and choose even if the managements of some of them behave badly. A tracker manager's only option to effect change and improve performance is therefore to use its power to vote down resolutions that aren't in the interests of shareholders at annual general meetings.

Active managers such as Fidelity or M&G argue that they can simply sell the shares of companies that misbehave. That represents a cop-out. Malpractice over issues such as executive pay is now so widespread they would have to sell off huge chunks of their portfolios if they were to do that in all cases.

Second, many big fund managers operate "closet trackers". These funds look very similar trackers because they hold a wide range of companies, but their managers have the option of taking big positions in businesses they like, reducing holdings in those that they don't.

Some argue that active fund managers should still make their votes count because that would improve practice across the range of companies in which they invest and generate better returns for investors in the long run.