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Investing

Managers begin walking the walk on fostering long-term outlooks

Jonathan Doolan
Jonathan L. Doolan said the need for a long-term focus is ‘very top of mind.’

A number of global money managers are determined to show their commitment to focusing on the long term, with recent moves to combat short-termism in client reporting, investment and their own businesses.

Consultants say active money managers, eager to prove their worth, are working in tandem with the long-term investment horizons of their institutional investor clients. Schroders PLC, for example, which has 416.3 billion ($536.2 billion) in assets under management and administration, recently announced it would only issue full financial reports at the end of the second and fourth quarters, restricting information for the first and third quarters to changes in assets.

“We believe that the excessively frequent reporting, and subsequent management of financial performance, increases the pressure to make short-term decisions,” said a statement provided by a spokeswoman. “We are a company focused on long-term, sustainable growth and therefore we have taken” this decision.

The statement cited a 2012 report by British economist and author John Kay, which concluded that excessively frequent reporting puts pressure on decision-making. U.K. policymakers responded by changing regulations to allow U.K. companies to report less frequently.

“In light of these developments, (we) have changed the way we report and we want to encourage the companies in which we invest to review their approach to reporting quarterly earnings,” the Schroders statement said.

Shareholders were supportive, added the statement, and analysts understood the rationale. “However, we do appreciate that sell-side analysts are obliged to work on shorter time horizons,” and for that reason, Schroders continues to provide updates on assets under management and administration by segment and channel at the end of the first and third quarters, the statement said.

10-year performance reports

Also focusing on the long term, beginning at the end of May, Hermes Investment Management will lead client reports with 10-year performance numbers, rather than shorter-term figures.

Eoin Murray, head of investment at the 30.8 billion ($39.7 billion) money manager, said the new approach is just part of helping investors think long term. “There's much more information in general now incorporated within our reports that reflects our approach to responsible investing,” he said.

Conversations with clients as well as the 2015 publication of a Guide to Responsible Investment Reporting in Public Equity, produced by 16 U.K. public and corporate pension plans representing more than 200 billion in assets, have helped refine Hermes' own reporting, Mr. Murray said. The aim of the guide was to emphasize that quality reporting can help improve transparency and accountability between asset owners and their managers.

“Since the publication of the guide, we have had a series of discussions with clients with respect to enhancing the level of ESG content within our own quarterly reports in order to ensure that we are delivering what is expected by our investors, as well as leading best practice,” Mr. Murray said.

Further enhancements are underway “that we believe will improve disclosure and the level of information, in addition to reversing the prominence given to shorter-term over long-term performance,” he said. Initial moves will be to introduce “specific fundamental ESG commentary when discussing stocks with reference to portfolio activity.”

Consultants say they are having more conversations with managers about the need for a long-term approach.

“This is very topical and something we have done a fair amount of work on recently with managers — and if we haven't done work with managers, it has been very top of mind in terms of dialogue,” said Jonathan L. Doolan, New York-based principal at Casey Quirk, a practice of Deloitte Consulting LLP. “In the 10-year period since the crisis, everything has been pushed toward short-termism.”

That is at odds with the value proposition behind active management, he said. “The concept is we're going to buy companies that will over the long term hopefully outperform the markets.”

Mr. Doolan said the math tells investors they need to hold a stock for six to eight years for that. “If investors themselves have become more short term in nature, which has happened, you're left holding an investment strategy that has no chance of being able to achieve its outcome. Investors are not getting the opportunity to play through a full market cycle,” he said.

However, seven- and 10-year performance numbers “have almost made it either completely out of the documents, or into the last few page of the document as everyone wants to talk about more recent and current trades,” Mr. Doolan added. “We've seen managers try to bring that back to the front of the deck, start dialogue with a background of, 'Let's talk about where we are vs. long-term objectives.'”

Client support

The desire to become more long term in thinking and operation has its challenges. Mr. Doolan highlighted issues including competition in a low-return environment, the proliferation of new strategies that do not yet have a long-term track record and the short-term perspectives from clients due to their own pressures.

Executives at retirement plans had mixed reviews of the changes being made by money managers.

“The pressure for short-term reporting can lead to an unhelpful focus on short-term performance and drive behavior that isn't necessarily aligned with members' long-term interests,” said Paul Todd, director of investment development at the 1.7 billion National Employment Savings Trust, London. “We'd support any trends toward having a longer-term focus, both from investment managers and the companies we invest in, which is what really matters when it comes to member outcomes.”

The top executive of the €26 billion ($28.4 billion) Etablissement de Retraite Additionnelle de la Fonction Publique, Paris, wrote in an article published in October on the pension fund's website that “it is about time we get rid of this short-termism.”

CEO Philippe Desfosses suggested large institutional investors make the first move and decide “we will not report any more on a yearly basis our performance but average it on the last four or five years.”

Mr. Desfosses also addressed the issue of perceived short-termism by the managers running investor assets.

“How can we expect our asset managers to change if, ourselves, we are unable to change the way we report to our trustees and stakeholders. We are the owners and our asset managers are supposed to do what we ask them to do. Long-term investors should stop reproaching their asset managers for being 'short termist' when, actually, most of them are still adopting 'strategic' asset allocation for … one year.”

Truly long-term investors can steer their investment portfolio in a clear direction, maintaining “their tack for years,” Mr. Desfosses wrote.

Colin Pratt, investments manager at the 3.2 billion ($4 billion) Leicestershire County Council Pension Fund, Leicester, England, said he has no view on how often money managers should report their own financial results.

“In terms of the reporting of performance of the investments, I don't think it really makes any difference about the order of periods if the client understands that short-term performance is not necessarily a guide to the 'skill' of the manager.”

Trustee boards with a long- or at least medium-term outlook “should be able to see through the short-term noise and focus on the things that drive the processes of the investment manager; if, for example, a value manager underperforms in a period that value is out of favor, this should be seen as an inevitable outcome.”

However, he did say he would “question a manager that suddenly changes the order of reporting if its long-term numbers were good but short-term weren't, but (I) think it is ultimately the client's choice in what periods are reported and the order that they are shown,” added Mr. Pratt.

This article originally appeared in the May 29, 2017 print issue as, "Managers begin walking the walk on fostering long-term outlooks".