I used to do some work in this space and may get around to writing a more in-depth response soon, but I’m pretty busy right now, so in case I don’t, two things:
1) Even if you think shareholder activist strategies have outperformed the market historically, the activism space has become substantially more competitive in the last 3-4 years or so, and it has begun to face growing regulatory pressures, so I generally expect that any activism-related arbitrage opportunity that may still exist will shrink over time until it is no larger than the cost of mounting an activism campaign.
2) See here for some pertinent background on the corporate governance ecosystem.
Hrm, this is useful context, but I think you may be getting at a different issue. For the mutual funds that I’m looking at, they seem to be viewing shareholder activism as a potential avenue to have prosocial (ESG) impact on the companies that they invest in, such that their activism strategy likely increases fees a bit without impacting returns either way.
Ah, sorry, I must have misread your original question. Here are my top-level takes on the question you did, in fact, ask:
1) I see some of these Calvert funds have done well over the past few years, but I’m sufficiently convinced by some form of the efficient markets hypothesis to be skeptical that their above-market returns will continue to exceed their fees over the medium-to-long-term.
2) While I do think that shareholder activism through the proxy process can occasionally yield important, positive changes in the corporate world, the levers of corporate governance are limited enough that I very seriously doubt that the money you’re spending on Calvert’s fees is doing more good maintaining your investments in those funds than it would do if it were donated to, say, Malaria Consortium’s SMC program.
3) It’s important to remember the actual comparative here. It’s not Calvert vs. an evil money manager; it’s probably Calvert vs. BlackRock, which has been loudly pushing its portfolio companies to be more conscientious about their impact on the climate. Of course, on account of its scale, BlackRock’s mutual fund and ETF offerings will be much, much cheaper than comparable funds offered by Calvert, and also on account of its scale, BlackRock controls a far larger number of shareholder votes than Calvert does. Ultimately, you have to ask yourself: How often do BlackRock and Calvert vote in different directions on issues that I think are genuinely high-impact (assuming Calvert always casts a socially optimal vote, which I also doubt)? And: How often are Calvert’s votes likely to decide those shareholder elections (when BlackRock is voting the other way)? And: How often are my Calvert fund shares likely to make the difference in whether Calvert decides those shareholder elections favorably? If you were to try to model that, I suspect you’d find that investing through Calvert isn’t much at all better for the world than investing through BlackRock, and to the extent that it has some extraordinarily modest advantage, it is likely inferior to the value of simply donating the fee money to a high-impact charity. Of course, if you think the Calvert funds will continue to beat the market over time, that would change the calculus, but like I said, I consider that unlikely.
The levers of corporate governance are pretty limited. The corporate form is designed to limit the extent to which minority owners of common stock can intervene in corporate operations. As a result, most proxy proposals of social concern pertain to public disclosures (e.g. of environmental impact, of lobbying expenditures, of pay equity data, etc.) or to the appointment of sympathetic board members/removal of unsympathetic board members. These are nowhere near a majority of total proxy proposals, but they’re a sizable percentage of total shareholder proposals (most of which do not pass). For more detail on this, see this comment.
I used to do some work in this space and may get around to writing a more in-depth response soon, but I’m pretty busy right now, so in case I don’t, two things:
1) Even if you think shareholder activist strategies have outperformed the market historically, the activism space has become substantially more competitive in the last 3-4 years or so, and it has begun to face growing regulatory pressures, so I generally expect that any activism-related arbitrage opportunity that may still exist will shrink over time until it is no larger than the cost of mounting an activism campaign.
2) See here for some pertinent background on the corporate governance ecosystem.
Hrm, this is useful context, but I think you may be getting at a different issue. For the mutual funds that I’m looking at, they seem to be viewing shareholder activism as a potential avenue to have prosocial (ESG) impact on the companies that they invest in, such that their activism strategy likely increases fees a bit without impacting returns either way.
Ah, sorry, I must have misread your original question. Here are my top-level takes on the question you did, in fact, ask:
1) I see some of these Calvert funds have done well over the past few years, but I’m sufficiently convinced by some form of the efficient markets hypothesis to be skeptical that their above-market returns will continue to exceed their fees over the medium-to-long-term.
2) While I do think that shareholder activism through the proxy process can occasionally yield important, positive changes in the corporate world, the levers of corporate governance are limited enough that I very seriously doubt that the money you’re spending on Calvert’s fees is doing more good maintaining your investments in those funds than it would do if it were donated to, say, Malaria Consortium’s SMC program.
3) It’s important to remember the actual comparative here. It’s not Calvert vs. an evil money manager; it’s probably Calvert vs. BlackRock, which has been loudly pushing its portfolio companies to be more conscientious about their impact on the climate. Of course, on account of its scale, BlackRock’s mutual fund and ETF offerings will be much, much cheaper than comparable funds offered by Calvert, and also on account of its scale, BlackRock controls a far larger number of shareholder votes than Calvert does. Ultimately, you have to ask yourself: How often do BlackRock and Calvert vote in different directions on issues that I think are genuinely high-impact (assuming Calvert always casts a socially optimal vote, which I also doubt)? And: How often are Calvert’s votes likely to decide those shareholder elections (when BlackRock is voting the other way)? And: How often are my Calvert fund shares likely to make the difference in whether Calvert decides those shareholder elections favorably? If you were to try to model that, I suspect you’d find that investing through Calvert isn’t much at all better for the world than investing through BlackRock, and to the extent that it has some extraordinarily modest advantage, it is likely inferior to the value of simply donating the fee money to a high-impact charity. Of course, if you think the Calvert funds will continue to beat the market over time, that would change the calculus, but like I said, I consider that unlikely.
Thanks! This is helpful, and nudging me away from this approach.
Do you know of any good primers to get a better sense of how/when these levers get used on socially relevant issues?
The levers of corporate governance are pretty limited. The corporate form is designed to limit the extent to which minority owners of common stock can intervene in corporate operations. As a result, most proxy proposals of social concern pertain to public disclosures (e.g. of environmental impact, of lobbying expenditures, of pay equity data, etc.) or to the appointment of sympathetic board members/removal of unsympathetic board members. These are nowhere near a majority of total proxy proposals, but they’re a sizable percentage of total shareholder proposals (most of which do not pass). For more detail on this, see this comment.