Investing for the Long Term. Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T F

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1 Investing for the Long Term

2 Responsible Pension Investment Definition Responsible pension investment is the integration of environmental, social and governance (ESG) considerations into investment management processes

3 Active Ownership Education Engagement Courses Advocacy Conferences Proxy Voting

4 When measurement gets in the way Overall incentives towards short-termism should be removed by changes in criteria for institutional investment mandates (towards longer-term assets), and by a lengthening of performance evaluation periods for asset managers. Seventy-three percent of survey respondents believe that the current emphasis by institutional investors on short-term performance metrics should be discouraged. This would be the most important means of changing the attitudes of investment managers and their clients towards long-term investing. CFA Centre for Financial Market Integrity

5 Long Horizon Investing The UN wants more LH investing. The OECD wants more LH investing. The World Economic Forum wants more LH investing. The 100 participants in the recent Rotman ICPM- Generation Foundation workshop identified 10 concrete steps their organizations could take towards creating and managing functional LH investment programs. Clearly, there is visible movement towards the idea of LH investing, and it seems to be gaining momentum. (Ambachtsheer Letter, July 2013).

6 The Kay Review The Kay Review of UK Equity Markets and Long-term Decision Making July 2012

7 The Kay Review Let s revisit the notion of fiduciary duty: The Law Commission should be asked to review the legal concept of fiduciary duty as applied to investment to address uncertainties and misunderstandings on the part of trustees and their advisers.

8 The Law Commission response What can fiduciary investors take into account? Do fiduciary standards encourage lemming behaviour? Do fiduciary duties encourage too much diversification? Do fiduciary duties discourage stewardship?

9 The Kay Review The Kay Review of UK Equity Markets and Long-term Decision Making Companies should seek to disengage from the process of managing short term earnings expectations and announcements.

10 The Kay Review For beneficiaries, the risk is that such a mandate will not deliver the returns that at least match the liability. For the investment manager, the risk is underperformance against the selected benchmark. We were told that the result of all these pressures was frequent resort to closet indexation. Although those who appointed asset managers were seeking and paying for active management, the portfolios that were constructed for them tended closely to follow the index.

11 uity Fund Portfolio Turnover Rates Portfolio Turnover Year % turnover Source: The Mutual Fund Industry 60 Years Later: For Better or Worse? John C. BogleSource. Financial Analysts Journal 2005

12 Short term behavior Behavioral Finance We are subject to biases and myopia as a result of mental framing : Three dollars a day (the price of your morning coffee!) seems less costly than $1095 per year There is 50% chance of success instead of 50% chance of failure. Take time to seek out savings on small items, but spend unwisely on big-ticket items (mental accounting) Think differently about the short term and the long term.

13 What can we do? Trustee training identified as important The need for pension fund trustee education came up on multiple occasions. Trustees who understand the market forces that produce short-termism will be better equipped to do their part to stop it. (CFA Centre for Financial Market Integrity) Get informed Understand short term biases Ask questions about long term investing

14 What can we do? Ask questions of your investment managers The interests of beneficiaries are largely interests in longterm absolute performance. The concern of asset managers and the basis on which they are monitored by many asset holders, and by advisers to asset holders and retail investors is short term relative performance. This misalignment of incentives creates many problems. (The Kay Review) Participate in this debate in the early stages

15 It is not a case of choosing those [faces] that, to the best of one s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees. (Keynes, General Theory of Employment Interest and Money, 1936).