WHITEPAPER

February 28, 2018

Long-term investing in public equity markets:what does success look like...and how to organize it?

By Jaap van Dam and Lars Dijkstra

In 2015, fifteen Dutch CIOs of asset owners and asset managers wrote an article with the title: ‘Short-term profit or long-term value creation?’ A growing group of pension funds, asset managers, consultants and companies worldwide try to answer this question.

Introduction

The core aspects of long-term investing are the following: you pay attention to value creation, the potential to create strategic value with the companies you do or do not invest in; so you think fundamentally about investing; your portfolio has focus and therefore invests in far fewer companies than in the entire market; you invest with patience; you are involved, you act as an owner; you pay attention to the societal impact of the company, for example CO2 emissions. The benchmark then has a completely different, more of a free role than what’s currently the case when investing in public equity markets.

This paper is a practical next step following the article of the CIOs. We try to be as concrete as possible, and we go from ‘why’ to ‘how’. The ‘how’ of long-term investing has two major challenges, namely (1) how to minimize the principal-agent problems around long-term investments, and (2) how to maximizethe impact on the companies in which you invest. We mainly focus on the first challenge and discuss four practical topics in this article:

  1. What does success look like?

  2. How to organize long-term investments well? How to regulate governance?

  3. How to shape mandates and how to monitor progress?

  4. How to give the asset manager the right incentives?

We see the pension fund as the party that seeks to organize long- term investments well, in the interest of its participants. Whilst this paper is for an international audience, we realize that there may be international differences between, for example, the views on sustainability or societal effects.

Download the full whitepaper (pdf , 94.64 KB)
Download

RELATED THOUGHT PIECES

October 26, 2017
Making an impact by defining the right mix of ESG strategies
Whilst supranational institutions and NGOs have for too long been alone on the front lines of the battle against poverty, corruption, and resource depletion, both companies and the finance sector are now fully aware of the role they have to play in the transition to a more sustainable economy. So-called “megatrends” – demographics, globalisation, the environment, societal evolution – act as disruptive forces and offer growth potential for investors. The motivations of asset owners have evolved; they have become more elaborate, more complex and more meaningful, and now include topics that go beyond the unique consideration of achieving financial performance. Even if performance remains the primary objective, investors now want their portfolios to have an impact on both the environment and society, and want to measure the efficiency of this choice.