Sunsuper investment chief, Ian Patrick, is buying unlisted assets despite record prices that are set to climb even higher as super funds scramble for yield. Patrick concedes that buying private assets in this environment is a tough call.

“Do you choose the somewhat compressed returns for private assets or the near zero or negative returns for bonds?” he asks.

While the super fund is buying assets at a higher price, Patrick says his team are focussing on areas where the price moves have been less aggressive.

The investment chief says the mountain of dry powder waiting to be invested, coupled with the broad intent of asset owners globally to buy alternatives, will put a floor under prices.

At the same time, he also senses that the lofty valuations are about to “top out” and that “some rationality will persist at current high levels.”

In fact, he can see signs that the frothiness is starting to dissipate in asset prices generally, including in private markets.

That said, he also believes private markets prices will only drop significantly when bond rates, or more specifically the discount rate, picks up. Alternative strategies now make up 30.5 per cent of the $70 billion super fund’s assets.

“That’s because we feel that valuations in listed market assets have been looking increasingly toppy and the forward returns looking increasingly less attractive,” he adds. Patrick also doesn’t think that super funds have the flexibility to avoid investing in private markets given the broad spectrum of economic activity in that space.

“The way to ensure you participate is to make sure your funnels of access to deals and opportunities are as broad as possible and part of that is having a diverse spread of primary private equity funds and seizing the opportunity to co-invest off the back of that.

“With the future of capital markets set to become more privately oriented, it’s going to be harder for mega asset owners like AustralianSuper, Sunsuper or QSuper to rescale those exposures since those markets aren’t growing fast enough.”

Patrick disagrees saying private markets are scalable but once funds grow beyond $400 billion, finding assets is quite tricky. Interestingly, Sunsuper, which is in talks with QSuper to create a $182 billion giant, expects assets to double organically in the next five years.

Not an option

“It’s tricky for us and for other funds that are growing,” he says. “Taking our foot off the accelerator is not an option. If we don’t deploy any further dollars to private equity and make no further commitments to GPs, our allocations will drift down from close to 7 to 5 per cent in a very short time.”

Patrick says if investors don’t succumb to “squeezing the last drop” out of private assets, then they can sell at reasonably good valuations today and hold that liquidity for the public markets when they sell-off.

“That’s a fantastic position to be in, if you can get the timing approximately right.” Sunsuper’s assets are expected to double organically in the next five years which is forcing the fund to hunt for what Patrick calls “eclectic, idiosyncratic alternative strategies”.

The CIO says there is a whole range of investment opportunities that fall between the cracks of the typical narrowly-defined asset class buckets and which have an interesting return profile. The fund’s bucket of unlisted assets includes everything that typically lies outside other risk asset classes according to Patrick.

In terms of capital allocation, the idiosyncratic alternative opportunities are currently running at 6 per cent of the alternatives bucket. Patrick says a good chunk of the allocation is in small-to-medium business loans and special situation bridging finance because of the attractive returns.

“There is a range of asset-backed finance activity that people find hard to put in a traditional fixed income bucket because it doesn’t involve issuing investment grade bonds with standard terms and conditions,” he says.

Patrick cites shipping finance as a classic example as such an investment. It can’t be classed as infrastructure – since it is not a monopoly asset with a long predictable income stream – and geopolitical risks like trade wars or a supply glut in shipbuilding can impact returns, according to the CIO.

“It’s illiquid but with the right operators you can get quite strong returns from that kind of asset – multiples of government bond yields,” he adds. “That’s where we are trying to look,” says Patrick. “It’s a clunky and a labour-intensive process but prospective returns are looking reasonably healthy. “ He much prefers investing in those kinds of deals rather than lend to a traditional general partner buyout sponsor to help complete a deal. “Pricing has become very tight and conditions for lending have become quite lax” in private equity,” he warns.

The CIO also says the idiosyncratic elements of the deals become more attractive as they don’t have the same wall of money pushing down the return premium that other alternative strategies have.

Thus, these strategies tend to be more specialist and harder to execute and that raises a complexity premium which he says is particularly attractive in a low return environment. “You can harvest a complexity premium by pursuing a private equity opportunity that is less about financial leverage and more about consolidating players in a fragmented industry into a much more scalable efficient entity.”

Patrick cites a Scandinavian paper mill that had taken on too much debt in the run up to GFC as the demand for print paper products started to tank. One of the fund’s managers acquired the senior debt, seized control of the company before restructuring – ahead of a listing – which will return significant capital to investors.

“You could call it ‘distressful control’ but there was a bit more to it than that,” he said There is evidence of the complexity premium in all of Sunsuper’s  unlisted portfolios including a Czech gas network asset in central and eastern Europe or south Eveleigh, the redevelopment of the Australian technology park.

Patrick expects equities to grind higher for a while yet since growth looks to be adequate and the central bank bias is to support growth and asset prices. He adds that corporate balance sheets are also in good shape, cost disciplines are well entrenched, and consumer spending is still semi robust.

Even so, fears of a broad-based downturn in earnings could trigger a change in sentiment. He says investors are seeking out that “last little bit of return” and in so are extending risk disproportionately just when the economy cannot support ongoing earnings growth.

“When those things come together – sometime in the next two years – we will see equities come off.”

This coming January, CIOs from 15 US foundations will gather in a private get-together in New York to compare notes and discuss topics of interest. With no external managers, consultants or sponsors present, conversation will focus on foundations’ shared characteristics like their need to meet charter commitments to last into perpetuity. Or the challenge of complying with US government IRS (Internal Revenue Service) rules that they must allocate 5 per cent of their assets annually to chosen causes, or lose their tax exemption.

“We have to earn 5 per cent plus inflation to ensure we can remain into perpetuity in real terms,” says Rosalind Hewsenian, CIO of the $6 billion Helmsley Charitable Trust.

It’s just the kind of gathering the young foundation finds particularly insightful. Only set up in 2009 after colourful real estate billionaire Leona Helmsley bequeathed most (not all though – her dog also inherited millions) of her and her late husband Harry’s vast wealth to pioneering healthcare initiatives, Helmsley is the new kid on the block.

“We haven’t been around for that long,” says Hewsenian. But the trust’s youth also comes with benefits. Like its ability to have harnessed all the learnings of the financial crisis which wreaked havoc on foundations without enough liquidity on hand to pay out grants, casting them on the rocks of an IRS breech.

“If the market sells off we still have to get our money out of the door,” says Hewsenian, who joined Helmsley in 2010 and has crafted a straight forward, contrarian strategy with liquidity at its heart.

Four liquidity seams run through the portfolio ranging from a safe allocation (currently 23 per cent) to short maturity, investment grade fixed income that can be liquidated in a day at one end of the spectrum, to a 37 per cent allocation to private markets where it takes two years or more to get money back from external managers, at the other.

The other seams comprise liquid (27 per cent) and semi-liquid (13 per cent) allocations to assets like public equity and high yield bonds where money can be accessed within 60 days, and hedge funds and long-only frontier equity allocations involving longer tie-ups, respectively.

The high allocation to safe assets is a consequence of being mid to late cycle.

Today’s markets requires a balance between boosting safe assets so there is enough on hand to pay grants and pour into opportunities when the market sells off, but still retain exposure to return generating allocations in recognition that markets are continuing to appreciate.

It all rests on analysis of where the economic cycle is now, explains Hewsenian who counsels against any forecasting or bold predictions.

“Lots of people make forecasts but when the forecast is wrong it costs them dearly.”

Determining where markets are today involves analysis of historic and current market and economic factors. If today’s factors plot outside key bands, it indicates the market is at one extreme. If indicators are within their bands the market is mid-cycle.

“Economic and market factors spend most of their time in the middle of our bands but move out in early, and late cycles. As you might expect, we have been in an economic recovery for the last 10 years, so some factors are showing late cycle, although some are still mid cycle.”

It is a highly structured approach that doesn’t involve debate or huge amounts of judgement. The bands are checked every quarter and the results bought to the investment committee for a decision. An adjustment is typically made just once a year.

“Any move has to be sustained so that it is worth our while. When there is lots of noise, and no clear signals, we don’t make a move.”

Nor is there any element of market timing in the strategy, it is simply following the signals.

“If there is a market sell off, all the market factors in the portfolio would automatically revalue. We would take our safe asset down to the lower end of the range which is about 10 per cent,” she says.

Generalists

A key element to success is her generalist investment team with all 12-investment staff having a broad expertise rather than dedicated specialism.

It means they can switch to different allocations when their markets “aren’t’ looking good” and have a broad understanding of how the different parts of the portfolio work as a whole.

“It allows people to make the best, most considerate investment recommendations for wherever we are in the cycle,” she says.

For example, the foundation recently sought to boost its semi-liquid investments in line with the late cycle by allocating to life settlements. The novel investment outside siloed asset classes involves investors buying life insurance policies off holders who have decided they’d rather have a cash windfall than the insurance policy. These lump sum payments are typically less than the death benefit on the policy, which the investor collects when the insured passes.

“We wanted to find something that wasn’t correlated to equity but with the same liquidity as our semi-liquid category to help us through a downturn,” she explains. “Life settlements allow us to get all of our money back and there is no downside risk as everyone does, eventually, die.”

The allocation is a tad over 2 per cent of AUM (all investments at the trust have a 2 per cent of AUM minimum) in what Hewsenian describes as a “one and done” allocation.

“This will get us through the next economic downturn,” she says.

Hiring generalists was a founding stipulation, informed to a large extent by Hewsenian’s own broad, consultancy background.

“As a consultant I had to talk on anything,” she says.

Despite it being part of the culture in the New York investment office, Hewsenian observes it is still hard pushing people out of their comfort zones.

“People like their own corner of world,” she says.

However, she believes the trust’s comparatively few manager relationships make it easier.

“We only have 43 manager relationships. The team have time to do the due diligence because they are not having to monitor hundreds of relationships.”

All assets are managed externally excluding an ETF portfolio used for asset allocation purposes.

Innovation

The trust doesn’t only give grants to fledgling healthcare and wellness projects. It also invests for returns in the sector, allocating 7 per cent of its AUM to healthcare and longevity. Investment sits in the illiquid allocation and is mostly via private equity and venture capital funds – as well as innovative hedge funds. Witness an allocation that shorts consumer goods brands that the elderly buy less – think furniture, technology or even cars.

“The idea is that as demography changes, consumption patterns will also change with older generations buying more healthcare and less consumer goods,” she explains.

As for the success of the allocation, it’s hard to tell. Political uncertainty in the US is leading to unknowns around healthcare provision, she says.

“The Democrats espousing of Medicare – for-all is having a chilling effect on the publicly traded healthcare stocks.”

In one heartening trend, the venture capital and private equity allocation is beginning to find its way into some of Helmsley’s initial grant-receiving projects.

“When we give grants it is very early stage,” she says. “Sometimes it is just a scientist with an idea.”

Following 10 years of grant-giving some of these ideas are starting to spin out into commercial ventures.

“We can then put them in touch with our VCs,” she says.

ESG

One area few foundations have led the way, however, is ESG integration. Something Hewsenian attributes to the enduring pressure on foundations to focus on their specific missions, rather than deviate to other causes.

“My trustees believe we have an honourable and just mission and that it is their job to advance that mission. It’s my job to earn the money to fund it and not use the assets to address other missions that are not Helmsley’s. While ESG is important, our mission is healthcare and medical research and they want me to reflect ESG only if it positively affects our performance and results.”

That said, she notices foundations are starting to put more pressure on their asset managers in this regard. As more foundations embrace ESG they want their managers to restrict investments so they are ESG compliant. It’s a shift that she says is complicated by the fact many of them are long-standing relationships with asset managers who have served foundations for years.

“Competitive asset managers don’t want investment restrictions. They want to invest the way they want to invest, and I think this will increasingly become an issue,” she predicts. Something, perhaps, on the agenda in January.

Montreal-based CN Investment Division’s recent search for a quantitative analyst in its absolute return team is a timely reminder that pension funds must now align with the tech sector on compensation, culture and work environment to secure talent.

When Marlene Puffer, president and chief executive at the division which manages the $18 billion pension fund for Canadian National, Canada’s freight rail group, reached out to her network enquiring after candidates she was more conscious than ever that she was going head to head with the tech and start up sectors.

“They recruit for similar talent,” she said. “The financial sector is not as obvious a draw for a business school or STEM graduate as it used to be, but it should be. We need to explain the great opportunities in order to be able to attract and retain talent.”

Puffer, whose role spans everything from using her network to help field candidates for the 40-strong investment team to writing the annual report or getting into the weeds of a private equity decision, believes CNID has that pulling power.

Compensation involves a “competitive salary plus a variable component where investment professionals get paid well when performance is strong” in a model, she says, that keeps “reasonable pace” with top-paying Canadian peers.

Montreal’s ability to compete with global financial or tech centres is bolstered by locals returning home after pursuing careers elsewhere. As for culture, she believes CNID’s size, sophistication and long history of internal management offers a sweet spot that allows the investment team to evolve, ensuring individual portfolio managers can really have an impact.

Governance

CNID’s ability to recruit top talent also comes down to governance. Much of its ability to ensure good ideas are implemented without lengthy and arduous processes (at least in public markets – it takes longer in private markets) comes from the board.

It’s an area where Puffer has real expertise following a nine-year stint as chair of the asset liability management committee at $74 billion Healthcare of Ontario Pension Plan (HOOP).

It meant investment decisions and investment-related initiatives come through her on route to going to the board for approval. The experience has given her inside knowledge on how boards work – particularly the investment approval process – and left her convinced that open and transparent communication between the board and investment team is one of a pension fund’s most important pillars.

“I am bringing all my experience on the board at HOOP to bear in the context of reporting to the board. I am very familiar with board concerns and I have a pretty good idea how to be proactive and provide the right information for them to make informed decisions.”

At CNID, board education resides with the investment team. When something is new and different, like the quant strategies in the absolute return fund, it can require several steppingstone meetings ahead of any decision, she says.

Set up in 1935, serving 50,000 members most of whom are retired, CNID is one of the most mature, open pension funds around. The asset mix and risk profile are shaped around the constraints of paying out around $1 billion a year in benefits.

It means the backbone to Puffer’s asset liability and risk management strategy resides in a large bond portfolio that provides a liquidity pool on an ongoing basis.

“Because our plan is very mature, our portfolio is probably a little lower on public equity and private and illiquid return-seeking assets than other plans, and higher on fixed income, and we include absolute return strategies as a core part of our long-term asset mix, ”she says.

Equity

CNID’s equity allocation, all actively managed, has seen some of the biggest changes in recent years. Geographic silos in five portfolios (Canada, US, Asia, Europe and emerging markets) have been shifted to one global benchmark, MSCI All Country World Index, while bottom-up research is organised globally by sector.

The old system based on geography was a legacy stemming from when Canadian pension funds’ foreign investments were restricted prior to 2004, she explains. Although Canadian asset managers have run their equity allocations globally for a while, pension funds have been slower to change.

“It’s more efficient because we are not duplicating efforts within sectors, and the focus on the total equity portfolio outperforming its benchmark is clearer.”

Elsewhere she notes that current portfolio strategy is erring on the defensive side given today’s market conditions. But rather than adjust the long-term asset mix in response, she prefers to tactically position within asset classes. For example, CNID’s actively managed, bottom-up, fundamental analysis of individual companies with a long investment horizon has a very successful track record, and still offers exciting opportunities.

“We can always find some value in individual businesses with a long-term view,” she says.

She is also examining the diversification benefits of private equity in light of current markets. CNID currently has a small allocation to private equity, mostly because of its liquidity priorities.

“My view of private equity is to focus on its ability to offer some access to different business models currently unavailable in public markets, rather than seeing it as a distinct asset class. But that opportunity set comes with a heavy fee structure, and you have to wade through this very carefully.”

She also continues to see opportunities in private debt in the US as bank disintermediation continues to play out.

“There are opportunities within private debt resulting from the regulatory change since the financial crisis such as leveraged loans, SME enterprise lending, peer-to-peer lending.”

Internal management

CNID’s long history of internal management means the bulk of assets are now internally managed, setting the fund apart from peers.

“Most peers of our size in the North American market would either be primarily externally managed or may manage their fixed income or foreign exchange internally.”

Much of CNID’s internal expertise has been drawn from its manager relationships over the years, all shaped around CNID’s quest for strategic advice and knowledge sharing.

“When we have a new idea, we may engage our external managers and build parallel internal strategies. We may eventually wholly internalise the strategy. We are transparent about our needs and have positive, constructive relationships.”

Currently visible in building out the diverse, factor-based quant team which she very much considers “our own,” but which has also been developed and crafted with the help of external managers relationships.

There has been much debate around the IPO market for tech firms in Australia where the Australian Stock Exchange (ASX) has been resolute in resisting the trend towards allowing dual class share listings. Markets such as Hong Kong have moved towards this model, which eventually culminated in the listing of Alibaba shares in November. One often cited case is that of Atlassian, which in 2015 chose to list on the US NASDAQ rather than at home in order to utilise a dual class structure. Yet, often there are corporate governance flags raised when pursuing this sort of listing and it has never been more apparent than in the case of the failed IPO of WeWork, a start-up “unicorn” which has seen a precipitous fall in value in 2019 from $47 billion to $8 billion.

Red flags from the start

WeWork is a provider of well-appointed office space on a flexible basis with more than 500 locations globally. Since the beginning of its IPO process there were clear red flags on corporate governance. These included unusual related party transactions from the $6 million purchase of the trademark for the word “We” from a company controlled by founder and ex-CEO Adam Neumann, to several leases signed at buildings owned by him. The company also provided loans to the founder in order to buy these properties at favourable interest rates. Another concern was the archaic succession plan where in the event that Neumann is unable to act as CEO, a two or three member committee headed by his wife would hand pick the new CEO. While much was subsequently remedied, arguably the greatest concern was the outsized control that he was afforded.

The double-edged sword of dual class shares

After the failure of the IPO, Neumann was provided an exit package essentially totalling $1.7 billion. This headline pay-off seems extraordinarily high for a never profitable company, yet this was the premium required for new owner Softbank to seize control as a direct result of the disproportionate super-voting shares held by Neumann. In the initial August 2019 S-1 filing with the US SEC, WeWork disclosed three classes of shares, two of which, nearly exclusively held by Neumann, held 20 votes per share. While DCS structures are not uncommon among US tech IPOs, WeWork’s structure was extreme even compared to other famous listings that left founders with “only” 10 votes per share such as Facebook and Snap Inc. While there was a unique sunset mechanism linking WeWork’s super-voting shares to charitable giving, this is now defunct.

The typical argument for dual class shares is the benefit of a founder guiding a firm without external pressures especially during the early stage of public existence. WeWork proved to be an example of the exact opposite. Public investors judged Neumann to be detrimental to the future of WeWork, hence the DCS structure rather than a mechanism to further corporate growth became a major obstacle. As disclosed in the S-1, major external investors in the firm held 165 million shares, compared to Neumann’s 115 million shares with economic rights, a 60/40 split. However, in voting power Neumann’s Class B and C shares held over 2.2 billion votes, which dramatically flips the ownership ratio to 7/93. Due exclusively to his super-voting shares, Neumann held de facto total control of the firm and any effort to push him out would require a significant payout, which is exactly what transpired with Softbank footing the bill.

Risks of massive private capital formation

This leads us to the true culprit in this massive paper loss of value, Softbank. Since announcing their unprecedented $100 billion “Vision Fund” in 2017, Softbank has arguably been the leader in inflating private market valuations. This came to an apex during WeWork’s January 2019 valuation round prior to filing for IPO, where Softbank invested an additional $2 billion at a valuation of $47 billion, bringing their total investment at that time to $10 billion. Now after paying off  Neumann for control, Softbank will have invested nearly $20 billion in debt and equity in a firm they value at only $8 billion. The only silver lining is that public shareholders are not on the hook, which would have been the case if the IPO had proceeded. Clearly there remain major risks from the opaque world of private capital raising.

While a handful of VCs will need to take write-downs, the true losers in this whole debacle are the WeWork employees. Not only did this failed IPO trigger a reported 4,000 layoffs or 27 per cent of the 15,000 workforce, but also employees who were mostly paid in stock awards and options will see their rewards wiped out. It is estimated that 90 per cent of current and former employees now hold equity awards below their grant price, meaning they are left holding worthless paper while their founder walks away a billionaire. While illiquidity will always remain a risk when earning equity at any privately held firm, the massive decline in valuation at WeWork is by no means normal. If the cadence of capital raises were better managed, this risk to employee’s shares could possibly have been mitigated. Whether Softbank will be able to turn around WeWork and recapture value for employees remains to be seen, though given the massive amount of capital invested they should be well incentivized to do so.

Protecting investors at all stages of growth

CFA Institute has written in detail on the shift from public to private capital formation. In our November 2018 report Capital Formation: The Evolving Role of Public and Private Markets we highlight the regulatory challenges of maintaining market integrity in the then-ebullient private fund-raising environment. One key policy response would be to encourage better disclosure and transparency standards in private markets as well as improving access to private investments for a broader set of investors, potentially providing better due diligence. Similarly, once a firm has reached a stage where an IPO is viable, CFA Institute has argued that dual class shares are not preferred and should not exist indefinitely as detailed in the report Dual-Class Shares: The Good, the Bad, and the Ugly. We applaud the ASX for holding on to the age-old principle of one-share-one-vote, which provides for the fair functioning of corporate governance and protects minority shareholders’ rights.

Eugene Hsiao, CFA, works in capital markets policy for the CFA Institute in Hong Kong.

 

 

 

Long-term investors using short-term strategies

Most institutional investors have long-dated obligations that extend decades into the future. Consistent with their long time-horizon and the need to deliver inflation-beating returns, such investors typically allocate the majority of their capital to public and private equity, real estate and infrastructure assets. Increasingly, such allocations are managed with environmental, social and governance (ESG) concerns to the fore. Indeed, some investors have gone further and now seek to align their investment strategy with the UN Sustainable Development Goals.

Paradoxically, the same investors will often use strategies that are inherently short-term in their approach. The most obvious example is the momentum strategy, which involves buying recent winners and avoiding recent losers. This is a high turnover strategy that has nothing to do with the productive allocation of capital. Moreover, the procyclical nature of the strategy means that it will tend to amplify trends, distort prices and, in the extreme, contribute to bubbles and crashes.

Out-and-out momentum strategies are just the tip of a large procyclical iceberg. The still widespread use of tracking error constraints forces managers to chase the fastest-performing segments of the market to avoid breaching their mandate guidelines. Even in the absence of such constraints, asset managers willingly chase trends in order to manage their own career risk. And performance-driven hire and fire decisions by asset owners further embed a procyclical bias within financial markets.

All this adds up to a situation in which large investors who claim to invest with a long horizon and who wish to be seen as champions of a socially responsible form of capitalism, are in fact contributing to dysfunctional capital markets in which short-termism dominates long-term thinking.

The social costs of asset mispricing and short-termism are less visible than the more widely discussed environmental and social externalities, but may be no less damaging.

Traditional finance theory suggests that in more-or-less efficient markets, a company’s share price is a fair reflection of the fundamental worth of the business. In this idealised world, there is no difference between actions that boost the share price and actions that deliver long-term value. However, in the presence of asset mispricing this no longer holds. As a result, it is possible – and often highly remunerative – for CEOs to engage in financial engineering rather than productivity-enhancing investment. An egregious and widespread example of this arises when share buybacks are used to mask the dilutive impact of stock-based compensation packages under the cover of “returning capital to shareholders”.

Procyclical dynamics also support a tendency towards monopoly: a rising share price confers greater market power on a company, enabling it to buy up competitors, often using their overvalued stock to fund the purchase. Asset owners that employ procyclical strategies are thereby facilitating a gradual shift towards a less competitive, less productive economy in which monopolistic corporations can engage in rent extraction on a vast scale.

Furthermore, procyclical strategies exert positive feedback effects on markets which help inflate asset price bubbles. When these bubbles eventually burst they often inflict significant and long-lasting damage on the economy, resulting in job losses and wage stagnation.

Public calls for institutional investors to recognise the impact of their investment approach have so far been limited to divestment campaigns focused on specific issues – most notably in relation to fossil fuel and tobacco holdings. However, as attention shifts towards broader issues such as excessive corporate power and rising inequality, it seems likely that asset owners will need to justify their investment strategy on much more fundamental grounds.

This would not require a huge leap from where we stand today. Savers and activists are already asking why their pension savings should support anti-social corporate activity. They might also ask why their savings should support anti-social investment strategies. Regulators across many markets have become increasingly assertive in encouraging funds to consider ESG issues. A natural extension of this – and one very much aligned with the underlying objectives of the sustainability movement – would be to ask large funds to consider the extent to which the strategies they employ contribute to market instability and capital misallocation.

Even in the absence of regulatory pressure, socially responsible asset owners will naturally want to understand the impact that their investment approach has on the wider world. This means going beyond the now commonplace integration of ESG considerations and the use of sustainability-themed strategies at the margin. Indeed, it demands that long-horizon investors avoid strategies that undermine the efficient working of capital markets and which consequently impose an unrecognised cost on wider society. If long-term capital was managed with a genuinely long-term mindset, the private and social benefits could be immense.

 

At the international business of Federated Hermes, we believe that the investment management industry could be a potent force in building a better world; but today that potential is largely unfulfilled.

Here, we set out our vision for how investment management can deliver on that promise through active stewardship of the businesses it owns. This is vital. Success means delivering better, sustainable returns for investors while helping
solve some of the world’s most intractable problems.

We believe the purpose of investment is to create wealth sustainably over the longterm. That’s why focusing on wealth creation at the expense of the planet and society, the very future for which investors are saving, is counterproductive.

Our world faces multiple challenges – from climate change to inequality to Artificial Intelligence. Investment management has a key role in addressing those challenges. It must behave in a way that is consistent with solving the world’s problems rather than compounding them. This will have notable positive financial implications for investors and society, guarding against significant risks to the long-term health of the economy.

Click here to read our vision for how stewardship can create that change.