An alliance of large firms, fund managers and asset owners is mulling over metrics to measure the time horizon of global capital allocation.
Sarah Williamson, head of the Focusing Capital on the Long Term (FCLT), said the not-for-profit organisation was developing “some sort of scorecard” that would show whether the world was shifting its gaze beyond the short term.
“We want to see more capital moving to a long-term view but how do we know if we’re moving the dial?” Williamson said.
While the ‘scorecard’ plan was in embryonic stages, she said the FCLT targeted practical solutions for its influential group of 42 members that includes the world’s largest fund manager, BlackRock, McKinsey and the NZ Superannuation Fund (NZS).
“As our chairman [Mark Wiseman] put it, we’re a ‘do tank’ not a think tank,” Williamson said.
For example, she said the group’s recent 2018 Summit in New York hashed out practical approaches to boost long-term behaviour among members as well as setting goals for the organisation itself.
The FCLT event, which attracted over 110 delegates from 17 countries including two NZS staff, covered a number of topics such as board composition, long-term beliefs, listed markets and institutional investment mandates.
According to the FCLT Summit report, the group outlined several “actionable solutions” for fund managers and asset owners to skew investment mandates to the long-term including: letters of intent describing expectations around “performance, style drift, and capacity limits”; the need for two- to five-year contracts; and, offering “longevity discounts and deferred performance fees”.
“Roadblocks to implementing and publicizing long-term contract provisions include board knowledge, investment consultant agency issues, staff turnover, and requirements to rebid management contracts periodically,” the report says.
Williamson, who was in NZ last week to meet with NZS, said the FCLT was also pushing hard for companies to ditch quarterly forward earnings guidance.
“Quarterly guidance is the epitome of what’s wrong with short-termism,” she said. “It doesn’t help investors and has no credibility.”
About 30 per cent of companies continue to offer quarterly earnings guidance – a practice the FCLT Summit delegates vowed to snuff out.
Instead, the FCLT report says companies, for instance, should re-evaluate the “goals and tactics of investor days and conference calls”. Corporate interaction with investors should also include more discussion on core economic business drivers and “stewardship”, the report says.
Meanwhile, fund managers could improve corporate dialogue by embedding “ESG [environmental, social and governance] professionals more closely in the investment teams”, the FCLT report says.
Williamson acknowledged asset owners could be forced to focus on short-term targets for underlying investment managers under their governance structures.
However, she said simple techniques such as putting manager five-year performance figures first in any communication could subtly shift attention to the longer-term.
“Usually performance reports start with the [manager] short-term performance compared to benchmarks,” Williamson said. “We know that humans tend to anchor on the first thing they see so why not flip it around and start with the long-term numbers?”
While short-term performance would inevitably influence asset owner investment decisions, she said the evidence shows long-term strategies do produce superior results.
“Investors should look for reasonable results in the short run but excellent returns over the long term,” Williamson said.
She said currently investors were too distracted by short-term indicators.
“If you only look down at the speedometer and gas dial when you’re driving then bad things will happen,” Williamson said. “But if you only watch the road ahead and never check your indicators then you could run out of gas.”
FCLT launched in 2013 as an initiative of the Canada Pension Plan Investment Board along with BlackRock, Dow Chemicals, Tata Sons, and McKinsey. In late 2016 the body reorganised as a not-for-profit growing to about a dozen full-time staff and 42 members.