Long-term portfolio guide: Reorienting portfolio strategies and investment management to focus capital on the long term

Since the 2008 financial crisis, there has been plenty of discussion about the perils of short-termism, but concert­ed action to remedy them is lagging. In Focusing Capital on the Long Term, a Harvard Business Review article published in January 2014, Dominic Barton of McKinsey & Company and Mark Wiseman of the Canada Pension Plan Investment Board argue that “the single most realistic and effective way to move forward is to change the investment strategies and approaches of the players who form the cornerstone of our capitalist system: the big asset owners...Action must start with [them]. If they adopt investment strategies aimed at maximizing long-term results, then other key players—asset managers, corporate boards, and company executives—will likely follow suit”. In a recent survey of public and private pension plans and sovereign-wealth fund managers, respondents over­whelmingly agreed that while the ability to invest long term is an advantage, they do not necessarily have an effec­tive set of implementation strategies/tools to help them realize their aspirations to be long term. To address this lack of long-term tools for institutional investors (that is, asset owners, including pension funds, sovereign wealth-funds, mutual and other investment funds, and life insurance companies; and asset managers, including investment-management firms and internal portfolio managers at asset owners), Focusing Capital on the Long Term (FCLT) brought together more than 20 experienced investment professionals from nine institutional-investment organizations controlling an aggregate of over $6 trillion in assets under management. Its goal was to develop practical ideas for how institu­tional investors might reorient their portfolio strategies and management practices to emphasize long-term value creation and, by doing so, be a powerful force promoting a long-term mind-set throughout the investment value chain. The result of our work provides recommendations across five core action areas that all institutional investors must consider: investment beliefs, risk appetite statement, benchmarking process, evaluations and incentives, and invest­ment mandates. We believe these five areas collectively provide a framework for institutional investors to improve long-term outcomes for their portfolios, their investee companies, and ultimately for all stakeholders. The guide resulted from a collaboration among nine institutions including CPPIB, BlackRock, Caisse de dépôt et placement du Québec, Capital Group, GIC, New Zealand Superannuation Fund, Ontario Teachers’ Pension Plan, PGGM, and Washington State Investment Board. The ‘Long-Term Portfolio Guide’ gives practical ideas for how institutional investors might reorient their portfolio strategies and management practices to emphasize long-term value creation and, in so doing, become a powerful force for promoting a long-term mindset throughout the investment value chain. Read the full report.