A focus on putting capital to work for long-term wealth creation rather than short-term gains is experiencing a resurgence across the globe.
Pension funds want it. Money managers want it. Even a U.S. politician wants it.
Institutional investor sources say there has been a real push toward the long term, with both an increase in engagement with the corporate world to shed the short-term view and changes to ensure their own houses are in order.
These sources said companies and investors increasingly are disconnected: Companies are thinking about the next quarter's results, while institutional investors are looking at a far lengthier time horizon.
Recent moves stand out as bringing long-term focus of capital firmly back onto the agenda:
• Institutional investors and money managers have made changes to investment strategy targets, benchmarking and remuneration policies — both internally and for the companies in which they invest.
• The South Carolina Retirement System Investment Commission is developing a “100-year portfolio,” focusing beyond the current market environment to establish a target allocation that is driven by long-term risk and return expectations.
• U.S. Democratic candidate Hillary Clinton is calling for a move away from “quarterly capitalism” as part of her presidential campaign.
• The Investor Forum — a group of U.K. money managers, asset owners and company representatives — was established in October to promote long-term investment approaches.
• The U.K. government, also in October, announced the removal of mandatory quarterly reporting by companies. Legal & General Investment Management's CEO, Mark Zinkula, wrote to FTSE 350 companies in support of the change, stating that “(R)eporting which focuses on short-term performance is not necessarily conducive to building a sustainable business.”
• Martin Lipton, founding partner of law firm Wachtell, Lipton, Rosen & Katz, picked up Mr. Zinkula's letter. In a post on the Harvard Law School Forum on Corporate Governance and Financial Regulation, he called on the Securities and Exchange Commission to keep LGIM's observations in mind “in pursuing disclosure reform initiatives and otherwise acting to promote, rather than undermine, the ability of companies to pursue long-term strategies.”
• Another institutional investor, money manager, and industry-led initiative, Focusing Capital on the Long Term, was formed in December 2013, with the aim of encouraging members to take a longer view. Co-founded by the C$268.6 billion ($202.2 billion) Canada Pension Plan Investment Board, Toronto, and McKinsey & Co., members include Theresa Whitmarsh, executive director, at the $106.8 billion Washington State Investment Board, Olympia; and Euan Munro, CEO at Aviva Investments. Laurence D. Fink, chairman and CEO at BlackRock (BLK) Inc. (BLK), sits on the advisory board.
The push for long-term focus is a global one. Dominic Barton, London-based global managing director of McKinsey & Co., and co-chair of FCLT, in an e-mail highlighted a letter to shareholders by Mr. Fink last year that detailed BlackRock (BLK)'s efforts to de-emphasize quarterly metrics. Mr. Barton also pointed to work by a number of “major institutional investors,” including the Washington state board and CPPIB, that “have all made major pushes to elevate a long-term focus both within their own portfolios and within public debate.”
Regulatory change by the U.K. government has also helped. “In the U.S., this debate is gathering momentum as presidential candidates of both parties are beginning to discuss potential regulatory changes to encourage long-term corporate and investor behavior,” he said.
“Long-termism is an attitude, it is a frame of mind,” said Carsten Stendevad, CEO at ATP, Hilleroed, Denmark, with 691 billion Danish kroner ($103.2 billion) of assets. “It is not about a mandatory holding period.” Mr. Stendevad is a member of FCLT.
“It is clear that there is a pressure in the global financial markets, in the media globally, more and more toward short-termism: evaluating returns short-term, focusing on relatively short-term benchmarks; analyzing performance (every month) against a benchmark. For us, obviously we look at everything and monitor performance constantly, but the overarching (focus) is a long-term dial. But the whole financial community is focused on the short-term. We get pulled into that,” said Mr. Stendevad.
Change in mindset
For some, thinking longer term means a change in mindset. “We thought, "whatever gets measured gets managed, so let's measure the right things,'” said Adrian Orr, CEO at New Zealand Superannuation Fund, Auckland, which has NZ$29.5 billion ($18.5 billion) of assets. Careful thought followed on proposition, investment beliefs and how to measure success. “No one calendar measure says whether you are achieving what you set out to do,” he said.
The fund also has a significant in-house resource for engagement with companies. Mr. Orr is a member of FCLT.
In the past year, ATP “adopted a very simple, absolute long-term return target for our investment portfolio,” said Mr. Stendevad. Executives added return ratios that focus on long-term value creation rather than short-term performance; and the pension fund now provides participants not only with an expected future income projection, but also with positive and negative scenarios around that projection. That better demonstrates the uncertainty around future income, he said.
There is also a focus on remuneration policies — both for companies and for the in-house pension fund staff themselves.
PGGM, manager of the e161.7 billion ($180.2 billion) Pensioenfonds Zorg en Welzijn, Zeist, Netherlands — and whose CEO Else Bos is a member of FCLT — implemented new remuneration guidelines for portfolio companies at the beginning of this year, with the long-term a central part of the new guidelines, said a spokesman.
Mark Wiseman, CEO and president at the CPPIB, highlighted the dangers of short-termism in the board's 2015 annual report. “The best-run funds in the world today assess performance against long-term return targets and benchmarks that reflect risk-adjusted fundamentals,” he wrote. “Unfortunately too many asset managers still tie their compensation to outperforming an annual stock market benchmark, which takes their focus away from where it should be: on delivering sustainable, long-term returns.”
He said CPPIB wants its own people “to continuously think and act long-term,” and will “evolve our compensation system to reflect longer-term returns on both an absolute basis and relative to long-term (not annual) benchmarks.”
The focus from pension funds and other institutional investors is a welcome and necessary one, sources said. But even with the best intentions, a disconnect remains.
“As a pension fund you are not a trader, but an owner,” said Fiona Reynolds, London-based managing director at the Principles for Responsible Investment. “(But) you still see that, even though pension funds talk about being long-term investors, and active owners, they then have mandates with investment managers that are all about monthly and quarterly return — they are paid on short-term incentives, allow for the breaking (of a) contract on very short-term underperformance ... it is not joined-up thinking. If you want a manager to act in a certain way, you need to have a contract that makes them operate” in that way.
What is necessary is an alignment of interests and thinking, said Daniel Godfrey, a member of the board of the Investor Forum, and CEO of the U.K.'s Investment Association, which represents members with £5.5 trillion ($8.34 trillion) of assets under management. “There is a disconnect in the (investment) chain on time,” he said, with clients of financial services providers looking for long-term investments, but still measuring short-term results.
The Investor Forum's “objective is to work with all parts of the chain to try to create an environment of permission for people to think long-term,” he said. “Also to engage directly with companies when they appear to be doing things not in the interest of long-term wealth creation, but short-term maxing out.”
This article originally appeared in the September 21, 2015 print issue as, "Long-term view embraced anew".