In a recent op-ed in the Wall Street Journal, Dick Weil, co-chief executive officer of active fund-management firm Janus Henderson Group, argued that passive investors should abstain from voting as shareholders because they have “no interest” in the performance of particular companies. He even challenged Larry Fink, CEO of BlackRock Financial Management, which became the world’s biggest asset manager by virtue of its passive index funds, for his talk of “engaging” with gun manufacturers.
As this debate gains steam, I’m surprised no actively managed mutual fund — or hedge fund, for that matter — has seized this opportunity to highlight the difference that Weil speaks of by announcing it would sell its holdings in firearms makers. This is something index funds and exchange-traded funds simply cannot do. Fink and his ilk may talk about high-minded ideals, but actively managed funds could take actions that might make a difference. They would have looked like heroes (at least to the news media and about half the country ) and more importantly showcased the leverage they have over companies, helping them at a time when customers are leaving their funds for passive index products.
It isn’t as if the stocks of gunmakers are crushing it and helping the performance of these actively managed funds. American Outdoor Brands Corp. has lagged behind the Russell 2000 Index by more than 60 percentage points during the past five years while Sturm Ruger & Co. has trailed by more than 70 percentage points. And even if an active manager were on the pro-gun side politically, exerting pressure might help make the case that those funds that have the option of selling are better shareholders and possess leverage to alter corporate behavior.
Although Janus doesn’t hold shares of gunmakers in its mutual funds, active funds as a whole are much bigger shareholders than BlackRock and other passive funds. This is something that was widely missed in the news coverage of this issue, which was focused almost entirely on ETFs, when in reality active funds have bigger stakes.
In theory, if all of these active funds got together and sold all their shares of these stocks, it would create a snowball effect because then all the passive funds would have to sell in order to maintain the appropriate weightings in the index. In short, active funds lead, passive funds follow. Gun stocks gave the active funds a perfect opportunity to show this feature, as well as some fighting spirit.