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The Need for a Long Term View

Mark Wiseman, the President and CEO of the Canada Pension Plan Investment Board, writes in the Globe and Mail about the need to take a long term view of investment returns and not to focus too much on a single record year.

“News that any organization just posted its strongest annual return ever would typically trigger a celebration, but at the Canada Pension Plan Investment Board, our employees gave this just a moment’s pause. The tempered response to a stellar year may surprise some, but it’s consistent with our organization’s purpose: to maximize long-term risk-adjusted returns to the Canada Pension Plan Fund. The CPP is designed to support not only this generation of retirees, but generations to come, which is why we must focus on long-term results rather than any given year.”

“Maintaining a long view in a world dominated by short-term thinking requires discipline, especially during periods of large market gains or losses, when human instinct tells investors, large or small, to pop out the champagne – or to cut losses and run. As an organization, we develop systems and processes to instill long-term discipline for both the ups and downs, and we have the institutional memory to remind us that good times come to an end and that troubled markets tend to revert in time.”

Wiseman and co-author Dominic Barton wrote about their long term perspective in the Harvard Business Review last year: “Simply put, short-termism is undermining the ability of companies to invest and grow, and those missed investments, in turn, have far-reaching consequences, including slower GDP growth, higher unemployment, and lower return on investment for savers.”

They suggest four practical approaches for institutional investors serious about focusing more capital on the long term:

1. Invest the portfolio after defining long-term objectives and risk appetite: “Many asset owners will tell you they have a long-term perspective. Yet rarely does this philosophy permeate all the way down to individual investment decisions. To change that, the asset owner’s board and CEO should start by defining exactly what they mean by long-term investing and what practical consequences they intend.”

2. Unlock value through engagement and active ownership: “The typical response of many asset owners to a failing corporate strategy or poor environmental, social, or governance practices is simply to sell the stock. Thankfully, a small but growing number of leading asset owners and asset managers have begun to act much more like private owners and managers who just happen to be operating in a public market.”

3. Demand long-term metrics from companies to change the investor-management conversation: “Making long-term investment decisions is difficult without metrics that calibrate, even in a rough way, the long-term performance and health of companies. Focusing on metrics like 10-year economic value added, R&D efficiency, patent pipelines, multiyear return on capital investments, and energy intensity of production is likely to give investors more useful information than basic GAAP accounting in assessing a company’s performance over the long haul. The specific measures will vary by industry sector, but they exist for every company.”

4. Structure institutional governance to support a long-term approach: “Proper corporate governance is the critical enabler. If asset owners and asset managers are to do a better job of investing for the long term, they need to run their organizations in a way that supports and reinforces this. The first step is to be clear that their primary fiduciary duty is to use professional investing skill to deliver strong returns for beneficiaries over the long term—rather than to compete in horse races judged on short-term performance.”

Wiseman’s letter to contributors and beneficiaries is also worth reading.