Every year, hundreds of Scrip dividends are issued by companies. Managers must make a relatively straightforward decision: take a cash dividend or take additional shares.
It’s the duty of the manager to select the option that proves most lucrative to their clients. Unfortunately, many managers and advisers either opt for the less profitable option or choose to do nothing – that is, go with the default option, and take cash.
Their decision to make no decision is costing shareholders vast sums of unrealized gains.
Just how substantial is this amount? Our analysis shows that over $1 billion is being discarded annually just on Scrip dividends alone because of sub-optimal decision making.
Managers are missing the easy money, even when the ideal choice is clear. For example, with the National Grid dividend issue in May 2019, the stock election was significantly better than the cash option, being £0.4816 in the money. Even with the obvious
value, 55% of all shareholders took the cash option – compounded, the 24 basis points left on the table for these investors added up to £39,000,000 of missed value.
So why then are asset managers and advisers not seeing this value, especially when the analysis of a Scrip dividend can be relatively straightforward? There are multiple factors at work.
To start, some managers aren’t yet prepared to streamline the decisions and ramifications for portfolio management and compliance. For example, would the newly-acquired shares be considered a stock purchase? Regulatory and jurisdictional restrictions can
also influence the decision-making process; index trackers, for example, may not be mandated to take anything other than cash to avoid weighting error.
More often, it’s a matter of time. A manager may simply consider a Scrip election to be too small in terms of additional value and not worth analyzing. There are approximately 130 global Scrip dividends every year; if a portfolio manager were to miss $1,000
on each event, the overall unrealized value may be considered too small to bother with at $130,000. In many cases, acting on a voluntary corporate action often falls down the operational pecking order, handed over to the back office without enough due care
Yet, as we saw in the National Grid issue, these small amounts can add up quickly for asset managers – especially if every portfolio manager has exposure to the same event type. Per the hypothetical case outlined, if 100 portfolio managers in the same firm
make the same suboptimal elections, this adds up to $13,000,000 lost on one event type alone.
The nature of this problem goes far beyond just Scrip dividends. These issues are just one type of voluntary corporate action, which require an election or decision to be made on behalf of a shareholder, that can be generated by an equity or bond. There
are also rights issues, buybacks and tenders to considered. Taken altogether, the amount of missed value is staggering.
Beyond lost value, there are fiduciary considerations. Taking the default option without diligence may save time – but given that it ultimately produces sub-optimal outcomes for investors, it’s arguable that failing to conduct diligence is a fundamental
breach of fiduciary responsibility. And new regulations are raising the risk of fiduciary breach. MiFID II has ensured that managers now need to disclose how they elect on certain events which ensures a greater scrutiny from the underlying investors in future.
So besides awareness of the issue, how can managers and advisers capture more of this value? Developing processes that ensure efficient and optimal outcomes – not just for the clients, but for the investment and regulatory teams – are key. Managers must
have the ability to review dividends and other corporate actions and identify optimal decisions quickly, so as not to take away from other revenue-generating activities.
Indeed, the process of examining and electing a voluntary corporate action can be mostly automated. Appropriate internal controls are also relatively simple to put in place. Consultants and technology providers make this straightforward, giving firms the
tools and infrastructure to identify and maximize value. Yet, managers must also ask more of their fund administrators and custodians. These third parties should have their own ability to support managers where it may not make sense for them to do it all themselves.
An attitude change must also take place. No longer can these events be considered inconsequential, especially for the manager that strives to maximize value. Handling Scrip dividends and other corporate actions with appropriate analysis, processes and controls
will ensure that their fiduciary duty is met and that more of that previously unclaimed money is taken off the table.