Capital Decanted - Season 2, Episode 1: Long-termism: The Greatest Asset in Asset Management

Hosts: John Bowman and Kristy Townsend
Guests: Sarah Williamson (CEO of FCLT Global) and Jeff Rubin (Senior Managing Director and One Fund Strategist at CPP Investments)
Release Date: September 30, 2024

Introduction

In the premiere episode of Season 2, Capital Decanted delves deep into the concept of long-termism in asset management. Hosted by John Bowman and Kristy Townsend, the episode eschews superficial market takes to explore the nuanced balance of capital allocation. With insightful discussions led by industry experts Sarah Williamson and Jeff Rubin, the episode underscores long-term investing as a pivotal strategy for achieving superior investment outcomes and fostering sustainable economic growth.

Defining Long-termism

John Bowman opens the discussion by highlighting the overuse and dilution of the term "long-termism" in the industry. He emphasizes the importance of a precise definition to move beyond marketing jargon.

John Bowman [00:00]: “Long termism is the most un secret secret sauce or comparative advantage that should be wielded and exploited and parlayed into superior investment outcomes.”

Kristy Townsend echoes the complexity in defining long-term investing, noting that it varies based on organizational needs and objectives.

Kristy Townsend [11:02]: “I do think that there's usually a hurdle of this 10 to 20 year mark that a lot of people focus on as this long term aspect.”

John Bowman elaborates further, integrating insights from Liang Yin’s 2017 definition:

John Bowman [17:58]: “Long term investing is based on a high conviction of a positive payoff, with little regard for the timing of that payoff.”

Sarah Williamson adds that true long-termism involves maintaining commitment through adverse outcomes and organizational stability.

Sarah Williamson [58:19]: “Investing is an active endeavor and you should be revisiting all of the components of your portfolio regularly.”

Jeff Rubin distinguishes between "long-term investments" (assets held over extended periods) and "long-term investing" (the disciplined process of maintaining strategic commitments despite short-term volatilities).

Jeff Rubin [61:20]: “Long horizon is the ability to maintain your investment posture without getting knocked down.”

Merits and Benefits of Long-term Investing

John Bowman outlines six key benefits of adopting a long-term investment philosophy:

1. Broader Investment Opportunity Set

   • Expands access to private markets and alternative assets not available to short-term investors.
   • Example: Private equity, real estate, and infrastructure investments requiring longer commitment periods.

2. Exploiting Countercyclical Markets

   • Enables investors to capitalize on market dislocations during periods of stress.
   • John Bowman [34:34]: “When most investors are succumbing to this disorienting pressure... you're running into the burning building when everyone else, as is said, is running out.”

3. Creative Partnerships for Capital Allocation

   • Facilitates innovative collaborations like joint ventures and co-investments to optimize returns and minimize costs.
   • Example: CPP Investments' joint venture with an Indian conglomerate for real estate investments.

4. Mitigating Agency Risk and Misaligned Objectives

   • Aligns asset owners with investment managers, reducing conflicts and ensuring fiduciary duties are met.
   • John Bowman [50:52]: “Agency conflicts arise when asset owners and intermediaries have differing incentives.”

5. Influencing Better Corporate Governance

   • Allows companies to focus on long-term value creation without the pressure of short-term market expectations.
   • Sarah Williamson [93:42]: “Long termism supports the real economy by fostering multi-generational commitments to infrastructure and innovation.”

6. Supporting the Real Economy through Productive Patient Capital

   • Direct investments in essential infrastructure and innovative sectors promote societal wealth and quality of life.
   • John Bowman [34:34]: “Long termism catalyzes innovation and cultivates societal wealth.”

Challenges and Indicators of Short-termism

Kristy Townsend presents a series of red flags indicative of short-term focus within investment organizations:

• Frequent board meetings centered on quarterly performance.
• Compensation structures tied to short-term performance metrics.
• Overreliance on market news and immediate liquidity.
• Examples include obsession with CNBC and impromptu meetings based on market fluctuations.

Kristy Townsend [49:12]: “If your internal team meetings are based on quarterly returns... you’re probably short term focused.”

Guest Insights: Sarah Williamson and Jeff Rubin

Sarah Williamson - CEO of FCLT Global

Sarah traces the origins of FCLT Global back to a collaboration between industry leaders like Dominic Barton and Mark Wiseman, aiming to bridge the gap between long-term investment intentions and actual practices.

Sarah Williamson [58:19]: “We created FCLT Global to change how capital markets operate by fostering long-term strategic conversations between investors and companies.”

She introduces FCLT Global’s Gold Standard, a framework assessing organizations' commitment to long-termism through governance, incentives, and engagement practices.

Jeff Rubin - CPP Investments

Jeff elaborates on how CPP Investments practices long-termism by maintaining disciplined investment strategies despite market volatilities.

Jeff Rubin [67:42]: “Maintaining a long horizon is about not getting stopped out during temporary downturns and sticking to your investment thesis.”

He emphasizes that long-termism is earned through robust governance structures, aligned incentives, and a culture that supports enduring investment strategies.

Blueprint for Building Long-termism

John Bowman synthesizes the discussion into a roadmap for institutional investors aiming to embed long-termism into their processes:

1. Governance:

   • Establish independent boards that support long-term strategies.
   • Implement structured decision-making processes that prioritize long-term outcomes over short-term performance.

2. Investment Policy Statements (IPS):

   • Develop clear IPS that reflect long-term objectives and risk tolerance.
   • Ensure IPS guide strategic asset allocation without frequent alterations based on short-term market movements.

3. Compensation Structures:

   • Align compensation with long-term performance metrics.
   • Incorporate multi-year performance evaluations to discourage short-termism.

4. Benchmarking:

   • Use long-term, absolute return benchmarks instead of short-term, relative performance metrics.
   • Simplify benchmarks to reduce performance chasing and pro-cyclical behavior.

Practical Examples and Best Practices

Kristy Townsend shares real-world examples of how organizations successfully implement long-termism:

• Australian Superannuation System:
  Converts retail individuals into long-term investors through structural reforms, enabling significant investments in infrastructure and private equity.

• MFS and CPP Investments:
  Demonstrate how strict compensation alignment and governance practices foster long-term investment commitment and performance.

Kristy Townsend [86:34]: “The Australians are a model for how structuring retirement systems around long-term investment horizons can lead to enhanced retiree outcomes.”

Conclusion and Key Takeaways

The episode culminates in a comprehensive understanding that long-termism is not merely a strategic preference but a fundamental necessity for sustainable asset management. By adopting robust governance, aligning incentives, and fostering a culture of enduring commitment, institutional investors can transcend the pitfalls of short-termism, leading to superior financial returns and positive societal impacts.

Notable Quotes:

• John Bowman [00:00]: “Long termism is the most un secret secret sauce or comparative advantage that should be wielded and exploited and parlayed into superior investment outcomes.”

• Jeff Rubin [61:20]: “Long horizon is the ability to maintain your investment posture without getting knocked down.”

• Kristy Townsend [49:12]: “If your internal team meetings are based on quarterly returns... you’re probably short term focused.”

Final Thoughts:
Capital Decanted effectively frames long-termism as the cornerstone of successful asset management, providing listeners with actionable insights and a strategic blueprint to cultivate enduring investment practices.