Modern craftsmanship Focusing Capital on the Long Term

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1 Modern craftsmanship Focusing Capital on the Long Term Lars Dijkstra, Chief Investment Officer CFA Future of Finance: We are in this for the long run Amsterdam, May 11th 2017

2 Kempen Capital Management Our values absolute dedication highly selective modern craftsman ship made for progress Kempen manages 48 bn* in niche strategies and solutions with 200 employees

3 Modern craftsmanship Focusing Capital on the Long Term Kempen initiated the SHIFT TO newsroom, to facilitate the conversation on long-term investing.

4 Modern craftsmanship Focusing Capital on the Long Term The rise of short-termism The importance of long-term thinking Academic and empirical evidence Modern craftsmanship

5 Short-term pressure for CEO s Over what time period do you feel the most pressure to demonstrate financial results? 0 to 3 months 13 4 to 6 months 7 to 11 months % 1 to 2 years 36 3 to 4 years 5 5 to 6 years 4 7 or more years 0 Don t know 3 Source: CPPIB McKinsey Focusing Capital on the Long Term survey 2015; n=384

6 CFO s missing out on opportunities to create long-term value 78% 55% Would give up R&D spending in order to meet short-term earnings targets Would forgo NPV+ investment to avoid missing EPS consensus by one cent Source: McKinsey Focusing Capital on the Long Term; n=400 CFO s

7 Short-term thinking is leading public companies to systematically underinvest Private Companies 9.4% Public Companies 2.2% For matched small-medium private and public companies in the US1; Survey includes 3,926 public companies and 32,204 private companies 1 Using NAICS 4 matched on size and industry (North American Industry Classification System) SOURCE: Net investment Comparing defined the as annual Investment increase Behaviour in net fixed of assets Public scaled and Private by beginning Firms, of Asker, year total Farre-Mensa, assets Ljungqvist

8 Modern craftsmanship Focusing Capital on the Long Term The rise of short-termism The importance of long-term thinking Academic and empirical evidence Modern craftsmanship

9 Long-term thinking across the investment value chain FCLT Global develops practical tools and approaches that encourage long-term behaviors in business and investment decision-making Savers Asset owners Asset managers Corporate boards Management Regulators and other stakeholders Source: FCLT Global

10 How to get rid of the barriers to long-term thinking? Asset owner Long-term mandates Asset manager Interact, engage and influence Corporations Minimizes agency issues through partnership agreement Maximizes impact through active ownership

11 How to get rid of the barriers to long-term thinking? Long-term ambition statement by 15 Dutch Chief Investment Officers Asset owners need strong long-term commitment Asset owners and asset managers jointly formulate investment beliefs; a constitution New metrics of success: more absolute return and risk-targets determined by liabilities minimum horizon of 5-7 years focus on companies instead of securities More long-term qualitative reporting instead of monthly NAV s Act as long-term engaged shareholders; ESG fully integrated More alignment of interest in business models and fees: between asset owners and asset managers between shareholders and corporations

12 The added value of long-term engaged shareholdership Long-term focus and active ownership are key to success Alignment between shareholders and companies is essential Short-termism leads to subpar returns and underinvesting Long-term thinking is in the interest of both shareholders and companies Focus on long term value creation Better allocation of capital for future generations Exploiting mispricing's between share price and long term intrinsic value Patient capital An engaged shareholder will be more focused on downside risk Shareholders and companies are in continuous dialogue In-depth financial and ESG-analysis improves risk assessment

13 Focus on companies or on securities? Turnover Percent Number of positions Positions per professional Intrinsic Traders Indexers <

14 Modern craftsmanship Focusing Capital on the Long Term The rise of short-termism The importance of long-term thinking Academic and empirical evidence Modern craftsmanship Kempen Capital Management 13

15 Some empirical and academic evidence The added value of long-term investing J. M. K e y ne s : + 8 % E m p i r i c a l e v i d e n c e A c a d e m i c e v i d e n c e W a r r e n B uf f e t : % O nt a r i o T e a c he r s : + 2 % K e mp e n Ca p i t a l M a na g e me nt : + 3 % F C L T G l o b a l D a vi d S w e ns o n: + 5 % R o b e r t E c c l e s e a. ( Ha r va r d ) : + 5 % M a r t i j n C r e me r s e a. ( Y a l e ) : + 2 % D a vi d Blo o d : + 5 % M o r e RD & jo b s Source: Ambachtsheer Letter april 2016, Eccles: Impact of Corporate Sustainability and Cremers: Patient Capital Outperformance

16 Cremers Patient Capital : High active share mutual funds with long horizon create value High active share and patience lead to net outperformance ( ) Active Share Holding period < 60% 60 to 70% 70 to 80% 80 to 90% >90% Total < 0.7 years to 1.0 years to 1.4 years to 2 years > 2 years Source: Cremers and Pareek 2015, Annualized abnormal outperformance of mutual funds Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently

17 Long-term firms invest more in R&D than other companies Average R&D expenditures $ millions per year 1,200 1, GFC Long-term (n=74) Remaining companies (n=211) % 14 Consistent with their longer horizons for value creation, long-term companies invest more in R&D than other companies This trend is particularly pronounced during the financial crisis, when long-term companies continued to invest while others cut R&D spending From , R&D spending for long-term companies grew at an annualized rate of 8.5% vs. 3.7% for other companies Years 1 Smaller sample due to less consistent company coverage for R&D data

18 Long-term companies created more jobs Average job creation Annual cumulative jobs added +20,000 Long-term (n=164) Remaining companies (n=451) Long-term companies create ~12K more jobs on average than others over a 15-year period +10, K Over the last decade, foregone job creation due to shorttermism was worth ~$1.2 trillion in lost GDP growth Starting employment Years Extrapolating from this difference, the US economy would have added roughly 5 million more jobs from if the entire market were long-term The economic impact of these foregone jobs grows to ~$170 billion in 2015, or ~1% of annual GDP

19 Modern craftsmanship Focusing Capital on the Long Term The rise of short-termism The importance of long-term thinking Academic and empirical evidence Modern craftsmanship Kempen Capital Management 18

20 Modern craftsmanship Criteria Modern Craftsmanship Partnership with client Alignment of interest in fee structure Integrated and pro-active ESG Active Ownership to create long-term stakeholder value Reporting Process oriented monitoring; company focused, based on intrinsic value, sustainable cash flows Long-term Prefer to own a company for 7-10 years; emphasis on strategic position and aligned management Absolute return driven Risk Focus Define target return with client Capital preservation is main priority Analysis of and engagement with selective group of companies

21 Competition between asset managers on the basis of relative performance is inherently a zero sum game. The asset management industry can benefit its customers only to the extent that its activities improve the performance of companies. John Kay from Kay Review, 2014

22 Modern craftsmanship Focusing Capital on the Long Term Lars Dijkstra, Chief Investment Officer CFA Future of Finance: We are in this for the long run Amsterdam, May 11th 2017 Kempen Capital Management 21

23 Disclaimer Kempen Capital Management N.V. (KCM) is licensed as a manager of various investment funds and to provide investment services and is subject to supervision by the Netherlands Authority for the Financial Markets. KCM has entrusted, under its control and responsibility, Kempen Capital Management (UK) Ltd. with the execution of the investment policy. This investment firm is subject to regulation of the Financial Conduct Authority and registered under no This presentation is for information purposes only and provides insufficient information for an investment decision. No part of this presentation may be used without prior permission from KCM. 22