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Asset Owners Voting for Tailored Policies

BlackRock’s Voting Choice functionality raises bar for other asset managers, as UK LGPS fund become first PIRC client to apply own voting policy. 

Asset owners which have been waiting for a “long time” for voting control in pooled funds are having their demands met by BlackRock’s Voting Choice, according to Tom Powdrill, Head of Stewardship at the Pensions & Investment Research Consultants (PIRC),  

The London Borough of Hounslow Pension Fund, a local government pension scheme (LGPS) fund, has become the UK-based proxy advisor’s first client to use the BlackRock service to apply its own voting policy on a pooled global index fund. 

Smaller pension funds with tens-of-millions of assets that lack the in-house capacity to develop their own voting policy use the PIRC or similar providers to turn their main voting concerns into a template to be used to generate voting recommendations. 

PIRC has worked with BlackRock to apply the Hounslow Pension Fund’s voting policy in respect of its investment in the US manager’s ACS World Low Carbon Equity Tracker Fund. It is the first PIRC client in a LGPS to have its holdings in a BlackRock pooled fund voted on according to its own voting policy. 

Previously, the manager itself would have controlled Hounslow’s votes, alongside other smaller investors in the fund.  

Powdrill described the process as being “relatively straightforward” and expects the Hounslow Pension Fund to be the “first of many” to take advantage of BlackRock’s Voting Choice functionality as there are “definitely other pension funds out there that want to take a similar approach”. 

Advancing asset owner stewardship 

BlackRock announced Voting Choice in October 2021, which offers institutional clients invested in certain pooled funds the opportunity to select a proxy voting policy applicable on a pro-rata portion of eligible shares held.  

The functionality was expanded in June 2022, and now enables clients invested in numerous funds to both utilise BlackRock’s asset management services and have their holdings voted according to their own voting policy or a third-party policy if they opt to. 

The institutional index equity clients participating in Voting Choice represent £404 billion. Since its launch, clients newly committed to Voting Choice represent £140 billion, including several defined contribution clients in the UK.  

Historically, for pooled funds, asset owners have been prohibited from having their own voting policies, meaning they have been unable to exercise votes differently to their asset manager even if they wanted to, according to Powdrill.  

“BlackRock have done something valued from a client perspective,” Powdrill said. “We’ve got clients in common [with BlackRock] and they definitely appreciate that this new functionality has been added on.” 

PIRC said that BlackRock’s move to enable proxy voting choice in pooled funds represents a “significant step forward for asset owners’ stewardship activity”, with other asset managers likely to follow suit. 

“There are now a variety of options open to asset owners which provide investors with greater ability to exercise their voice,” Powdrill said.  

Patrick Kilgallen, Head of Pensions at Hounslow Pension Fund, said: “Our primary fiduciary duty is to protect and enhance the long-term returns for our beneficiaries, and we want to be active in pursuing this objective. But taking our own position on the use of voting rights has in the past been precluded by pooled index fund structures. We are very pleased to finally be applying our own policy in our pooled holdings.” 

Alan MacDougall, Managing Director at PIRC, said: “With different motivations and duties across funds, the demand to be able to select a voting policy is very much on the up. BlackRock is to be commended for breaking the logjam that has frustrated asset owners for many years. It has changed the nature of the question for all asset managers about proxy voting choice from ‘if’ to ‘when’.”  

Left behind 

Powdrill said that since Blackrock’s introduction of Voting Choice other asset managers are looking to follow suit, with several either offering or in the process of developing similar functionality for clients. The ‘Big Three’ asset managers BlackRock, Vanguard and State Street Global Advisors have all launched initiatives to pass some voting rights to clients with DWS the first asset manager to offer this type of option in 2021.   

Earlier this year, fintech firm Tumelo urged the UK’s Financial Conduct Authority to force asset managers to disclose to investors whether they permit them to vote on their shares. In February, it released a whitepaper exploring pass-through voting.   

“As we understand it, so far Blackrock have gone the furthest of any manager in the range of pooled funds that that allow asset owners to vote how they want,” he said. He also underlined that voting choice functionality will become a “differentiator” for asset owners when selecting an asset manager.  

Powdrill predicted that pooled fund voting would become an important selection criterion for responsible investors. “Why would you stick your money in a fund where you weren’t able to apply your own values and your own policies? 

“For a manager, particularly a big manager, you’re going to have such a diverse client base that you can’t have one single voting policy that is going to meet everyone’s needs,” he added.  

“If you look at a charity or faith-based investor or NGO, those funds generally are not going to have particularly complicated investment strategies. They’re going to be exactly the sort of organisations that have quite distinctive views; they would never line up with a fairly mainstream voting policy.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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