A bee in my bonnet about stock lending
Stock lending is a practice which many, but not all, asset managers have participated in for decades. The income received sweats equity assets a little harder and provides some extra liquidity to markets. The stock lent is usually used to arbitrage tax differentials between different investors or to enable institutions wishing to go ‘short’ to deliver stock when they sell.
However, I am increasingly wondering whether it really is consistent with the spirit of acting as a responsible investor, as pension funds are mandated to do. One of the key tenets of the Stewardship Code is to use your vote at General Meetings but if you have ‘lent’ your stock you have to recall it in time to do that. In theory, this is always possible but it undoubtedly adds brittleness to the system: the owner may be up against a tight deadline and the chain of stocklending may involve several parties.
My other concern is that the lender of stock cannot prevent his stock being used for aggressive shorting, which I believe is directly contrary to the notion of being a responsible investor. The Stewardship Code simply states that investors should state their policy on stock lending, so the practice is not in direct contravention, but I cannot bring myself to say that it is consistent with the spirit behind the Code.
Ultimately, the judgement investors have to make is whether the return from lending stock makes it worthwhile and I am aware that passive investors in particular often rely on the practice to cover the frictional costs of running an index portfolio.
Buzz, buzz, buzz…
If you have a view on this subject please do contact me.