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Hortense Bioy, Morningstar

Morningstar ETF research finds increased awareness of corporate governance issues


Research firm Morningstar has recently published its report on the popularity of index investing and questions about corporate governance and how far index managers will go to ensure that the companies they hold are acting in investors’ best interests.

The firm surveyed the 12 largest providers of index funds and ETF funds across the US, Europe, and Asia including BlackRock, Vanguard, SSGA, Lyxor, and X-trackers.

The paper, ‘Passive Fund Providers Take an Active Approach to Investment Stewardship’, found that while most index managers are stepping up engagement efforts through proxy voting and engagement disclosure, investor scrutiny of stewardship practices is intensifying and the industry has room to improve.

On the flip side, the firm found that index managers in the US and Japan are increasingly willing to voice concerns, and in some cases directly challenge corporate management, catching up to the efforts of European managers from the past several years.

Based on the survey findings, Morningstar created a list of best practices to help investors assess the stewardship practices of the asset managers they partner with. Some of these to-dos for asset managers include having a comprehensive investment policy that is publicly available on the firm’s website; casting votes on the shares held by all funds, including passive funds; make the voting policy and voting records of all funds—including passive funds—publicly available on the firm’s website; publicly disclose rationales for key votes; allowing stakeholders to assess whether the asset manager has voted in line with its policy and in the best interest of shareholders; do not limit company dialogues to governance matters alone, and address environmental and social issues as a source of reputational and regulatory risk that can affect a company’s bottom line and engage with regulators, policymakers, index providers, and other stakeholders to help improve markets.

Hortense Bioy, director of passive fund research Europe Morningstar, explains that the research into corporate governance practices has been a big project for the firm.

“We were aware that those companies were beefing up their corporate governance teams, so we wanted to understand that space better. We know that investors are including more and more questions on engagement, voting and sustainability in their RFPs.”

In terms of ETF trends, Bioy reports that smart beta and Environmental, Social and Governance have stepped up to become the main trends.

“Next year I think we will see more active asset managers and also specialist boutique teams with an expertise in one particular area of the market who want to offer a product that is different from what is already out there,” she says.

“We will also see big players like JP Morgan, L&G and Fidelity coming out with more products, and more ESG and thematic products are going to be launched. This year we may see the highest number of ETF closures. Providers are closing small funds and rationalising their product ranges, which is a sign of a market maturing.”

Morningstar analysts rate over 460 ETFs worldwide, 153 in Europe, including 30 smart beta ETFs. These ETFs represent nearly two thirds of the global assets under management in ETFs.

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