Investigating long-term mandates

The PRI is investigating the experiences of asset owners that have engaged service providers in long-term mandates, and conducting a literature review on long-termism, in a bid to develop a reference guide on how to implement a long-term mandate and drive long-term behaviour.

Managing director of PRI, Fiona Reynolds, said the starting point, and initial question being asked was defining what long-term is. Signatories are also asked to report on their experiences with regard to governance and the important of investment beliefs, investment practice and long-term active ownership.

“We are starting with practical questions like what is long term, clear definitions and time frames are useful,” she says. “We will also be looking at the role of investment beliefs. We think they need to be part of the fund’s DNA, it grounds you in what you’re doing.”

Long-term is defined by some investors as the average life of liabilities, while others look at the style of investment, rather than the holding period.

The OECD defines long-term capital in terms of several characteristics – patient, engaged and productive.

PRI says that asset owners may find it helpful to establish a definition of long-term investment, and include it in the mandate with their investment managers.

“Our aim is to get feedback from signatories, and come up with good analysis into how to implement a long-term mandate as a reference guide, not a model mandate, but a reference. We want to drive long-term behaviour,” Reynolds says.

The discussion paper will look at long term mandate considerations including investment manager reporting and accountability, turnover and performance monitoring.

One suggestion is that managers’ performance monitoring reflects their long-term investment objectives including clarifying the broader criteria that managers will be judged against including such things as organisational stability, team development and succession.

It also asks questions about fees suggesting asset owners may find it useful to understand how investment manager compensation structures are aligned with the mandate objective, including the idea of discounted fees for longer mandates.

“Long term mandates could drive down fees,” Reynolds says. “If manager knows they have the mandate then fees should come down, it should follow.”

“From a manager point of view it’s not a threat. It could give more certainty about mandates. This could give more surety and security and certainty in business planning.”

Within equities, the PRI discussion paper also looks at fund structures, suggesting that investors may be able to learn from private equity investment vehicles.

New investment vehicles such as European Long-Term Investment Funds could be used to hold long-term investments in public equities, it says.

Part of the motivation comes from a policy and research work-stream the PRI established in September 2013 to address the barriers to the development of a sustainable financial system.

More than 90 per cent of PRI signatories said “short-termism” was a major barrier.

PRI believes long-term investment perspective is a critical enabler of responsible investment as it encourages long-term stewardship of assets and value creation.

A call for submissions from signatories is open until September 12.

To access the paper click below

Long-term-mandates PRI