Asset owners, asset managers, and companies created FCLTGlobal to encourage a longer-term focus in business and investment decision-making across the investment value chain. Institutional investors particularly have emphasized the importance of the mandate agreement between asset owners and asset managers as one way to improve this focus. Such agreements set the incentives and parameters for how they will invest together, so it was the right place to start for changing investment behavior.
FCLTGlobal published Institutional Investment Mandates: Anchors for Long-term Performance in December 2017. Many of our members have put this research to work since then, including MFS Investment Management.
MFS exemplifies ways that asset managers can lead the way on long-term mandates, starting with establishing a long-term frame in the way that it reports performance. Carol Geremia and Robin Stelmach, President and Vice Chair of MFS respectively, explain in a 10-page case study with one of the firm’s largest board relationships – its independent mutual funds board:
"One of our easiest but most significant shifts in reporting performance was to change the order of the timelines, which helped us to focus our discussion with the board on longer-term numbers. Instead of beginning with year-to-date, one-, three-, five- and 10-year figures, we began with the 10-year figure and dropped the year-to-date altogether. We also stopped highlighting the three-year figure, which made a significant visual impact.
In addition, we now sort the numbers and rankings by the five-year figure. The former approach perpetuated a focus on short-term results, while the latter shifted the focus to a more relevant long-term performance view, creating better-aligned conversations from the start with each portfolio manager."
Behavioral scientists call this the framing effect. The reference point at the start of a conversation frames everything that follows. Having a performance review focused on the long term is very difficult when the first bit of information is a year-to-date return. That sort of performance review is easier when the first bit of information is a 10-year return.
MFS didn’t stop here, though. The benchmark for an investment also is part of the reference frame, and MFS has honed the way in which it explains the selection and function of benchmarks. FCLTGlobal learned in our 2017 research that “how the benchmark is used and its reference time frame are more important than selecting a specific benchmark,” and MFS’ real-world experience gives life to this finding.
Choosing the types of performance to measure also is very important. MFS looked for “a metric that could assess our stated investment philosophy and process,” and stock turnover is one of the foremost metrics that it chose because “we believe using turnover data shows evidence of our process and conviction... This aligns with the longer-term outcomes of end-investors, such as those in pension or DC plans.” Members of FCLTGlobal’s 2017 working group expected that this would be the case and envisioned turnover as a key performance indicator for a long-term mandate agreement.
Adjusting mandate agreements in these ways may seem insignificant, but it’s not. There’s a potential for results that are outsized – but not necessarily easy to achieve. MFS emphasizes that “we had our own internal challenges. It took more time than we expected to build an understanding with the board and ensure that our efforts were not viewed as self-serving. However, it has been worth all the effort.”
Precedents like this one from MFS matter. Investors have the opportunity to take action that improves markets’ long-term focus – even as they also engage with sponsors, companies, and regulators – and the precedents that they set influence others to follow their lead. When investors put FCLTGlobal’s research to work like this, it all adds up to more wealth for savers and more stable funding for companies.
FCLTGlobal will release more case studies over the coming weeks about how global institutional investors are setting precedents and shifting their behaviors to incorporate more long-term approaches into both their investment processes and organizational structures.