In FCLT’s March 2015 publication 'The Long-Term Portfolio Guide', we argued that while progress has been made in the last few years with the creation of non-traditional indexes that are not solely focused on market capitalization, more could be done to design and utilize benchmarks that foster a longer-term orientation. If widely adopted by asset owners and managers, such benchmarks may well have the power to influence boards and management at investee companies, resulting in more efficient deployment of corporate strategies and capital aimed at long-term growth rather than short-term impact on stock price.
Taking on this call to action, Canada Pension Plan Investment Board (a co-founder of FCLT) worked collaboratively with S&P Dow Jones Indices to develop the newly formed S&P Long-Term Value Creation (LTVC) Global Index which launched on January 21, 2016.
The S&P LTVC Global Index is designed to track those companies that seek to create long-term value and is comprised of companies that have demonstrated the ability to manage both current and future economic and governance opportunities and risks by focusing on a long-term strategy. These companies must also have a sustained history of financial quality. Companies with these characteristics are more likely to maintain a competitive advantage and thereby sustain stakeholder value.
As an immediate indicator of the potential of the index to drive change in capital markets, six of the world’s largest institutional investors released a statement of support and a number of these investors committed to initially allocate approximately US$2 billion to funds tracking the S&P LTVC Global Index, with other investors closely examining their options for allocating capital in support of the Index.
The S&P LTVC Global Index combines qualitative and quantitative measures into a single metric to determine the potential for long-term value addition, including qualitative assessments to gauge corporate governance effectiveness and quantitative assessments of drivers of long-term investment returns – Return on Equity, Balance Sheet Accruals ratio and leverage ratio.
“Investors committing to using the S&P LTVC Global Index as an investment strategy will be sending a clear signal to corporate management that these are the factors long-term investors care about as we seek to generate value-building growth over time for the benefit of savers. And, more importantly, that as investors we will stick behind the corporate management teams that choose to focus on these factors,” said Mark Wiseman, President and CEO, Canada Pension Plan Investment Board (CPPIB).
This launch is a major milestone in FCLT’s mission to develop practical structures to support longer-term behaviors in the investment and business worlds.
For more information, see the S&P Dow Jones Indices' website.