Responsible investment has been core to Newton’s investment approach since our inception in 1978, when we began actively voting on our clients’ shares. Since then, our responsible investment approach has grown to include environmental, social and governance (ESG) integration and active engagement across all our strategies. This is done to identify risks and opportunities that have the potential to affect companies’ performance over the long term. This example of our active engagement work concerns our work with an infrastructure fund in Korea. While we first invested in this fund in May 2007, an opportunity for meaningful engagement arose eleven years later, and our investment team was able to play its part in improving the situation for both the company and its shareholders. This company has a mandate to invest in companies that construct, operate and manage infrastructure projects across the country, including toll roads, bridges, tunnels and ports. It then intends to generate profit from its investments and distribute these profits to shareholders.

What Was the Issue?

We consider ourselves not only shareholders, but stakeholders. After a decade of being invested in this fund, a situation arose in April 2018 where an activist investor bought a large stake in the company, and launched a campaign aiming to oust the current management by way of an extraordinary general meeting (EGM). The activist investor argued that the company’s business model had been simplified but that the fees charged by the management company did not reflect this development. With the firm’s business model having changed such that the fund was no longer actively seeking new infrastructure assets and would only be maintaining existing investments, the activist investor believed that this was akin to the fund changing from an active to a passive management approach but still charging active management fees, when it was no longer clear exactly what work those fees were funding.

How Did We Engage?

After the activist investor announced its intention to take over the fund by appointing its own director and manager, the fund’s management approached Newton as we were the biggest shareholder. We then entered into multiple engagements with both parties to review existing policies and hear the thoughts, concerns and plans for the fund from both sides. As we had had positive interactions with the company (and seen strong returns) over the eleven years we had held the fund, and because in situations like this we aim to engage with a firm if possible rather than ‘cut and run’, we made clear we would consider supporting the current management against the activist investor provided meaningful governance changes were enacted.

What Was the Outcome?

After multiple conversations back and forth, Newton voted against the hostile shareholder at the EGM and sided with the current management. We voted against the takeover motion because:

  • the current manager had consistently supported and respected minority shareholders over the course of our investment with the company
  • improvements were expected to the company’s fee structure and the strength of its board
  • the company had significantly outperformed peers and the market.

Ultimately, the activist investor was defeated and sold its position.

In January 2019, because of our engagements, the fund announced its revised compensation structure which was passed at the 2019 AGM with strong shareholder support.

This case study shows the value of actively engaging with companies in which we are stakeholders. While we recognized that legitimate concerns had been raised about the fund’s new business plan and the fees shareholders paid to the management company, we also knew that the current management had been incredibly effective in their roles, producing returns that exceeded those of both peers and the market across the decade we had been an investor.

By leveraging our position as a major shareholder and engaging actively, we were able to address these concerns head-on while also showing our support for other aspects of the business. This resulted in a fairer compensation structure being agreed, an outcome that was received well by shareholders. It also strengthened the board by way of the appointment of a high-quality, independent non-executive director with relevant skills and experience.

We believe the company is now better poised to develop with its new, more transparent governance practices – practices that may have never come into being without our active engagement work.

This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. ‘Newton’ and/or ‘Newton Investment Management’ brand refers to Newton Investment Management Limited. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the website or obtained upon request.

Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton.

Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved.

Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.

Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate.