Investing because the long-term matters - can Finland set the benchmark?
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Investing Because The Long Term Matters Can Finland Set The Benchmark? Dr Raj Thamotheram (with thanks to Tim MacDonald) Finsif sysseminaari 28.10.13 1
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I gave this presentation to Finsif at their annual seminar in Helsinki on 28th October 2013
Transcript of Investing because the long-term matters - can Finland set the benchmark?
Investing Because The Long Term Matters
Can Finland Set The Benchmark?
Dr Raj Thamotheram (with thanks to Tim MacDonald) Finsif sysseminaari 28.10.13
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Another narrative!2
Can Finland lead?
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Can Finland lead?
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Can Finland lead?
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Can Finland lead?
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Can Finland lead?
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Can Finland lead?
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Can Finland lead?
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Can Finland lead?
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Can Finland lead?
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Short-termism isnt working!
For end beneficiaries
For companies
For economies
For biodiversity or future generations
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End beneficiaries are hurting
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“....rethinking the purpose of current solvency regulations would make it possible to devote a larger proportion of Finnish pension asset to long-horizon, return-seeking strategies, thus raising the expected return on investments.”
Keith Ambachtsheer
Evaluation of the Finnish Pension System, Finnish Centre for Pensions (2013)
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Is so much hedging of short-‐term solvency risk really needed?
Could funds take a more robust long-‐horizon investment view?
Are ac=ve equity strategies as light in “beauty contest” inves=ng as they could be?
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11 fatalities 17 injuries
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11 fatalities 17 injuries
Latest BP cost estimate $40 billion 30% share price drop1-year suspension of dividends
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The dominant narrative = blame someone else!
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The dominant narrative = blame someone else!
“an Act of God” Rick Perry, Governor of Texas
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The dominant narrative = blame someone else!
“I left BP a long time ago, four years”
Lord Browne
“an Act of God” Rick Perry, Governor of Texas
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The dominant narrative = blame someone else!
"It's very dangerous to join up dots that may not be appropriate to join up"
Tony Hayward
“I left BP a long time ago, four years”
Lord Browne
“an Act of God” Rick Perry, Governor of Texas
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The dots that we shouldn’t join up….
Source: Yahoofinance.com
TexasRefineryAccident
TexasRefineryAccident
AlaskaOil
Spill
AzerbaijanGas leak
ViolationsOf CleanWater Act
PenaltiesFrom the
OSHA
Gulf ofMexicoOil spillThunder
HorseAccident
Charges forManipulation
Of gasmarket
Grangemouth2000
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The dots that we shouldn’t join up….
Source: Yahoofinance.com
TexasRefineryAccident
TexasRefineryAccident
AlaskaOil
Spill
AzerbaijanGas leak
ViolationsOf CleanWater Act
PenaltiesFrom the
OSHA
Gulf ofMexicoOil spillThunder
HorseAccident
Charges forManipulation
Of gasmarket
Grangemouth2000
“Up un'l April 19, his performance was excellent.”
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How much attention did “sell-side” pay to safety?
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7.50
15.00
22.50
30.00
“Hea
lth”
“Safe
ty”“F
ine”
"Pen
alties
"“S
pill”
“Injur
y”
"Incid
ent" o
r "ac
ciden
t"
“Fata
lity” o
r "de
ath"
"OSHA"
"Bak
er"
Total
numbe
r of o
ccure
nces
Occurences of keywordsO
ccur
ence
s
2005 - August 2010 (post GoM included) 2005 - April 2010 (post GoM not included)
Before the oil spill, 6 occurrences every 100 pages = the vast majority of reports do not talk about these risks at all.
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Behavioural finance expert: “analysts are biased”
n Unicredit: analysts claim that BP has a good operational momentum because of its “first-mover advantage in cost cutting”
5 = buy or strong buy recommenda2ons4 = add, overweight, outperform and accumulate3 = hold, perform, neutral2 = reduce, underweight and underperform1 = sell or strong sell
Source: SHEFRIN Hersh, CERVELLATI Enrico Maria, “BP’s failure to debias: underscoring the importance of behavioral corporate finance”, 21st February 2011
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Economies are becoming more dysfunctional
CFOs will trade off practically everything to protect the quarterly number
More bubbles, more damaging
Kay Review: investors are driving corporate short-termism
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The global situation is clear …unless you are in denial
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The global situation is clear …unless you are in denial
The ‘Perfect Storm’(UK Government Chief Scientist,
John Beddington, 2009)
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“The hallmarks of tomorrow’s world will be scarcity – of
land, oil, food and ‘air-space’ (for greenhouse
gases)”
US NIC, 2008
The global situation is clear …unless you are in denial
The ‘Perfect Storm’(UK Government Chief Scientist,
John Beddington, 2009)
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“The hallmarks of tomorrow’s world will be scarcity – of
land, oil, food and ‘air-space’ (for greenhouse
gases)”
US NIC, 2008
The global situation is clear …unless you are in denial
The ‘Perfect Storm’(UK Government Chief Scientist,
John Beddington, 2009)
[Climate change risk] “should compel all elected leaders to take immediate action”
Mayor Bloomberg, 2012
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What’s gone wrong?
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What’s gone wrong?
Investors are neither evil nor the sole culprits, rather we are co-creating this mess
Theory (MPT), codified in law (fiduciary duty) acts as a liabilty shield AND a straight jacket
Outcome = misaligned rewards + externalised costs + systemic risk
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The Way Forward?
Focus on the PURPOSE of pension funds!
Match assets with very LT liabilities in a way which values inter-generational fairness and is based on good economic/scientific/common sense
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Five priorities
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Five priorities
Address “Preventable Surprises” (eg stranded assets) - valuation and stewardship
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Five priorities
Address “Preventable Surprises” (eg stranded assets) - valuation and stewardship
Embrace Integrated Reporting (investors too!)
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Five priorities
Address “Preventable Surprises” (eg stranded assets) - valuation and stewardship
Embrace Integrated Reporting (investors too!)
Fundamentally re-think pay, incentives, time-periods, clawbacks
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Five priorities
Address “Preventable Surprises” (eg stranded assets) - valuation and stewardship
Embrace Integrated Reporting (investors too!)
Fundamentally re-think pay, incentives, time-periods, clawbacks
Engage in public policy and challenge anti-social corporations
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Five priorities
Address “Preventable Surprises” (eg stranded assets) - valuation and stewardship
Embrace Integrated Reporting (investors too!)
Fundamentally re-think pay, incentives, time-periods, clawbacks
Engage in public policy and challenge anti-social corporations
INNOVATE new investment forms
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Sharan Burrow of the International Trade Union Confederation has it right with her call to “hit the re-set button”
Suzanne Lynne Duncan of State Street Research documents what’s wrong with her “Influential Investor”
Keith Ambachtsheer of International Center for Pension Management says “The window to mount an R+D project to assess how to best do this may now be open.”
Paul Woolley, Jeremy Grantham, Jon Lukomnik, John Fullerton...
New international best practices are emerging!
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How can Finland be the first to act?
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Pensions have
scale
purpose
longevity
POWER
Starting Assumptions
Yes, they can trade, but what else can
they do?
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Negotiate
Real Estate
Energy
Infrastructure
Private Equity
Let’s assume we want to make PE more like RE,i.e. we want to make it
Evergreen.
How can we do that?
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What is Evergreen?Evergreen is a form of investment that enables long-term investors such as pension funds to share in the cash flows of mature stable businesses.
Financial returns are earned through these planned cash distributions, rather than through a hoped-for sale of the stock at a higher price than originally purchased.
In addition, interests can be truly aligned, with values negotiated into the sharing formulas, up front.
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How does it differ from traditional private equity
Traditional PE Evergreen PEtargets underperforming companies for transformational turnaround through a time-out from trading,
targets healthy, market-leading companies generating robust and
enduring cash flows for permanent exit from the trading markets
seeks to profit by increasing enterprise value which they realize
by selling that enterprise
seeks to share directly in cash flows currently being generated by proven
enterprise leaders
requires a compressed timeframe within which to complete the
required transformation and effect the required exit-by-sale
just keeps going, sharing in cash flows as earned to support ongoing
liabilities to retirees across the generations
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Evergreen Investor
Mechanical Investors Traders
Deep understanding of sector Algorithm (incl index) Makes bets
More likely to support management thru’ ST
volatility
Supporting/not supporting management
is irrelevant
Interested in earlier access to better news
20% 30% 35%
4-10 positions 100-150 positions 20 positions
Adapted from McKinsey & Co (“Communicating with the right investors”, Spring 2008)
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40%
20%
40%
Short-horizon active managementLong-horizon wealth creating Liability-hedging management
Innovating a new balance
“Institutional investors, led by pension funds, must continue to build and support dedicated, non-conflicted, special-purpose entities that translate good theory and empirical research into actionable strategies that consciously promote long-horizon wealth-creation.”
Keith AmbachtsheerThe Ambachtsheer Letter
October 2013
^
Finnish?40%
20%
40%
Short-horizon active managementLong-horizon wealth creating Liability-hedging management
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The safety analogy - investors can do the same!
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The Audience We Need to Convince27
The Audience We Need to Convince27
people who want things to continue
as they are
The Audience We Need to Convince27
people who want things to continue
as they arepeople who want to make a change
The Audience We Need to Convince27
people who want things to continue
as they arepeople who want to make a changepeople who just
want to do the right thing, right
The Audience We Need to Convince27
people who want to make a changepeople who just
want to do the right thing, right
The Audience We Need to Convince27
people who want to make a changepeople who just
want to do the right thing, right
The Audience We Need to Convince27
people who want to make a changepeople who just
want to do the right thing, right
The Audience We Need to Convince27
half look backward, to what is being done
people who want to make a changepeople who just
want to do the right thing, right
The Audience We Need to Convince27
half look backward, to what is being done
people who want to make a changepeople who just
want to do the right thing, right
The Audience We Need to Convince27
half look backward, to what is being done
half look forward, to what is can and should
be done
people who want to make a changepeople who just
want to do the right thing, right
The Audience We Need to Convince27
half look backward, to what is being done
half look forward, to what is can and should
be done
people who want to make a changepeople who just
want to do the right thing, right
ESG2.0 can pull the forward-looking half forward, to see the possibilities through the
window of R&D
The Audience We Need to Convince27
half look backward, to what is being done
half look forward, to what is can and should
be done
people who want to make a changepeople who just
want to do the right thing, right
ESG2.0 can pull the forward-looking half forward, to see the possibilities through the
window of R&D
The Audience We Need to Convince27
half look backward, to what is being done
half look forward, to what is can and should
be done
people who want to make a changepeople who just
want to do the right thing, right
ESG2.0 can pull the forward-looking half forward, to see the possibilities through the
window of R&D
The Audience We Need to Convince27
We all matter!
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We all matter! Yes YOU!
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We all matter! Yes YOU!
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We all matter!
Identify & empower the outliers who have the potential to succeed despite the odds (“Positive Deviants”)
Yes YOU!
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We all matter!
Identify & empower the outliers who have the potential to succeed despite the odds (“Positive Deviants”)
Act on what we already know is right (“Giving Voice to Values”)
Yes YOU!
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We all matter!
Identify & empower the outliers who have the potential to succeed despite the odds (“Positive Deviants”)
Act on what we already know is right (“Giving Voice to Values”)
When a critical mass of “bystanders” get off the fence, the team/company/sector will “tip”
Yes YOU!
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We all matter!
Identify & empower the outliers who have the potential to succeed despite the odds (“Positive Deviants”)
Act on what we already know is right (“Giving Voice to Values”)
When a critical mass of “bystanders” get off the fence, the team/company/sector will “tip”
Develop collaborative solutions to reduce free-rider/first mover disadvantage
Yes YOU!
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