Menhaden’s Goldsmith: Days of sitting back and collecting dividends numbered

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Many of the most significant forces reshaping the global economy are ones that are long-term in nature, from growing global populations to the rise of Asia and a changing global climate.

Investor stewardship is becoming increasingly important as a result. The days when investors could disconnect from what their assets are doing, sit back and collect the dividend each quarter – are increasingly numbered.

For investors who tend to hold investee companies for several years at a time this makes engaging with the management of portfolio companies on long-term sustainability issues an important part of generating steady investment returns.

It is only through taking time to engage with portfolio companies that investors can get a real sense of what is happening in those businesses.

That reduces risk because when you understand your portfolio companies more deeply, you can also encourage them to take a more progressive approach where required.

In light of the Volkswagen emissions case last year, we engaged with battery maker Johnson Matthey to ensure that their technology was not implicated in the scandal and to ensure they are prepared for the likely tightening of emissions standards in the next few years.

Simply put: the analysis of how well a company manages sustainability issues is becoming just as important to understand as the fundamental financial analysis of a company.

This is why we are likely to see a record number of shareholder resolutions on climate change in 2016 and why stewardship codes or similar regulatory guidance to investors on active ownership are now present in countries including the UK, Japan and South Africa.

For investors it is often a case of being a candid friend to portfolio managers. It is not about shaming or directly challenging companies on issues such as climate risk or labour management.

Instead, where there is a long-term commercial business implication, shareholders should be asking whether the company has good policies to manage risk and to whether that policy is being adequately monitored and managed.

Where necessary investors should work with the companies to improve these policies and processes over time.

It can be about helping companies find opportunities too. For example investors recently engaged with US water heater manufacturer AO Smith to explain how water heaters connected to smart grids could solve energy storage issues and provide enormous opportunity to the company.

For most fund managers, investing resources into engaging with the management teams of portfolio companies on long-term issues is about both making money and making a difference.

Ben Goldsmith is chief executive of Menhaden Capital.