Passive funds should only reflect their underlying indices, feel experts. Globally, passive funds are known to be activists.
Passive funds by their very definition are supposed to track their underlying indices. They are required to hold stocks irrespective of whether they do well or not. With such a tightly defined objective, passive funds tend to remain invested in order to provide low cost advantage to investors.
In a market where active funds are known to provide better returns vis-à-vis passive funds, how do passive funds go about generating value for its investors? Should passive funds take up an active role in improving the corporate governance of companies? We asked a cross section of industry experts to get their views on this issue.
Shriram Subramanian, Founder & Managing Director of In Govern Research is of the view that passive funds should also cast votes on company resolutions. “It doesn’t matter if they are passive funds. They can at least help in improving corporate governance of companies.”
Debasish Mallick, Managing Director & Chief Executive Officer, IDBI Mutual Fund says that irrespective of the size and nature of fund it is imperative to participate in improving the governance of companies. “The nomenclature should not make a difference. There are active funds which manage very less corpus. All funds – whether they are active or passive should act in the interest of unit holders by prudently participating in key company resolutions. If passive funds don’t participate in voting, the corporate governance of companies might deteriorate which in the long run can affect shareholders value.”
Some say that participating in voting incurs cost to the fund which in turn increases the total expense ratio (TER). “Passive funds only track the underlying indices. There is no fund manager intervention and research. This benefits investors in terms of lower expenses. Why should they increase their cost by participating in voting?” says the CEO of a private sector fund house.
“Passive funds should reflect the market whereas active funds ought to be active in shareholder activism. Active funds are supposed to outperform the market and hence it is necessary for them to take a tough stand. I think passive funds shouldn’t be participating in voting,” says Vinod Jain of Jain Investments.
If voting increases cost, one possible solution is to have a sizeable AUM in passive fund, which unfortunately very few fund houses have been able to garner.
Out of Rs. 1.57 lakh crore equity assets managed by the industry, passive funds don’t even constitute 1% of the pie. The relatively low assets may not give enough clout to passive funds to influence management decisions.
Globally, especially in US, where passive funds are more popular than active funds are known to yield significant power when it companies to having a say in company resolutions. US based investment management firm Vanguard has often voted against the re-election of directors in its investee companies. It manages $ 340 billion (Rs. 34,000 crore) in ETFs which makes it a major institutional investor in companies.
