On 9 November, the Focusing Capital on the Long Term (FCLT) initiative held a conference in London. The purpose of the event was ostensibly to bring together influential organisations to build greater momentum in the industry for longer-term investing – the benefits and obstacles to overcome. Dominant themes of the day revolved around shareholders (and their proxies) discharging their responsibilities as owners, and building trust and alignment between asset owners and asset managers.
Julian Samways, Managing Director of JPES Partners, chaired a panel comprising:
- Sarah Williamson, the CEO of FCLT Global
- Dominic Barton, global managing partner at McKinsey
- Stefan Dunatov, CIO at Coal Pension Trustees
- Lars Dijkstra, CIO of Kempen
The panel discussion raised several issues regarding the prevalence of long-termism within the investment industry, the benefits of embracing a long-term mindset, the obstacles that prevented this and how they might be overcome.
The dominant view (in the room, at least) was that there is a general desire by all investors to be long-term. However, this is inhibited by the perceptions of others’ limitations (eg asset managers’ perceptions that they will be fired for short-term under-performance, asset owners’ tendencies to see short-term under-performance as a signal of a manager’s (lack of) ability).
There is strong evidence that pressures in the investment eco-system are driving participants towards even greater short-termism (in investing and in corporate decision-making), particularly in emerging markets:
- 87% of executives and directors feel under pressure to deliver performance over two years or less
- 99% of 2015 earnings have been spent on dividends and buy-backs
- 55% of CFOs would delay net present value-positive projects to hit quarterly earnings targets
The impact of this short-termism is already visible in the US economy, which is deteriorating because of a sustained lack of capital investment. In order to remedy this situation, there needs to be greater understanding of both the negative impact of short-term thinking and of what differentiates successful long-term companies. However, when embracing long-term investing, there is a necessary trade-off between signal and activity: if investors look too long-term, the signal is too weak, while looking too short-term results in excessive trading.
Objective setting and measurement plays a crucial role. The ultimate aim of investing is to provide for long-term financial obligations – either indirectly to members, or by members to meeting their future consumption and lifestyle demands. This suggests re-orienting measurement away from a benchmark-relative metric and towards a metric that has greater relevance to members’ future financial needs.
These points sparked a discussion on investment mind-set: rather than trading ownership rights in the hope of a profit, a long-term investor should think and act as an owner of the companies in which they invested. This has implications for portfolio construction – specifically, investors need to question the rationale behind owning companies in which they have little faith (a common approach to investors who will “under-weight” a less-favoured stock relative to its benchmark weight). Asset managers charged their clients a fee for investing in stocks that they expected to under-perform, on the basis that their success is evaluated by their performance relative to their benchmark. Asset managers need to espouse the benefits of changing this practice, and asset owners need to call for a new approach – not least to better serve the interests of the end investor.
But is the concept of ownership perceived to be synonymous with being a shareholder? One view is that a desire for genuine ownership, and the ability to shape outcomes at investee companies, has led to the rise in popularity of unlisted equity. This may be good for the company, as owners and management are better able to work together, but from a societal perspective it tends to increase the concentration of wealth and limits the potential to share in its creation.
Genuine ownership within the public equity space is possible, but demands that investors look beyond shareholder value maximisation to other goals reflecting the company’s role within wider society, eg CO2 reduction. Clearly the fragmentation of ownership among asset owners limits their ability to impact company management, and investors need to solve the problem of increasing their collective influence without falling foul of regulations on collusion. This point has been raised as a key to unlocking better long-term investing at both the London and New York Thinking Ahead Institute roundtables.
Overall, there was a pervasive sense of willingness in the room to advance what is seen as a productive initiative. This is a cause that the Thinking Ahead Institute has championed for some time, and the more voices that are calling for a re-orientation to long-termism, the greater the chance of real change happening.