Sector exclusions lazy CIO says

Fund managers relying on sector exclusions to implement responsible investment policies may be doing more harm than good, one chief investment officer says.

Wednesday, July 4th 2018, 6:00AM

by Susan Edmunds

Simon O'Grady, chief investment officer at Kiwi Wealth, said it was becoming more common for fund managers to exclude a whole sector from their portfolios, as part of a drive to show they were responsibly investing.

But he said that was not a sound approach.

"Aside from the potential for these exclusions to outperform and leave investors out-of-pocket, blanket sector exclusions also remove the ability to engage as a shareholder and drive positive change in those sectors."

He said it compromised the fund managers' fiduciary duty to maximise returns for their clients.

Research had shown a blanket exclusion would damage returns because they made portfolios less diverse than they should be, he said.

"So nobody wins, and it’s an exceptionally lazy strategy to boot. Investors are being put at risk of underperformance, and excluded companies aren’t being pushed and challenged to change for the better."

But O'Grady said it was harder to manage a more granular approach, and fund managers needed a different framework to do so.

But he said investor pressure would build and technology would make it easier.

Fund managers needed to consider what right they had to use client money for social good if it had not been explicitly agreed, he said.

John Berry, of Pathfinder, said fund managers had a duty to act in the best interests of clients and needed to communicate with them clearly so they understood the objectives of each fund and the approach.

He agreed better results could be achieved with a deeper drive into ESG factors.

Kiwi Wealth has engaged global proxy voting adviser Institutional Shareholder Services to manage the research and execution of proxy voting rights across its in-house global equity strategies.

ISS provides research and voting recommendations for all shares held directly by Kiwi Wealth and executes a voting strategy in accordance with Kiwi Wealth’s industry leading responsible investment policy.

Proxy voting has been deployed previously in separate Kiwi Wealth fund components, like its Core Global enhanced index fund, which is built and directed by its in-house Kiwi Invest investment management team.

Tags: kiwi wealth responsible investing