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.
Adjusting mandate agreements to focus more on the long-term involves changes that seem insignificant but may yield outsized results. Reporting investment performance in reverse order, beginning with long-term returns and ending with quarterly returns, is one such change. It won’t grab headlines – it might even elicit shrugs – but it’s grounded in research about how people consume information. Institutional Investment Mandates: Anchors for Long-term Performance, published in the fall of 2017, describes the importance of moving beyond quarter-by-quarter figures when reporting on performance, and FCLTGlobal’s subsequent collaboration with Rotman School of Management at the University of Toronto reaffirmed the importance of how investment information is presented.
Many investors have taken this step, like Hermes, now known as the International business of Federated Hermes. Per a profile in P&I:
…beginning at the end of May , Hermes Investment Management will lead client reports with 10-year performance numbers, rather than shorter-term figures. Eoin Murray, head of investment at the £30.8 billion ($39.7 billion) money manager, said the new approach is just part of helping investors think long term. “There's much more information in general now incorporated within our reports that reflects our approach to responsible investing,” he said.
The California State Teachers’ Retirement System’s (CalSTRS) reporting to its trustee board is another prime example. CalSTRS focuses trustees’ discussion on the long-term, rather than the most recent quarter, by beginning the report with 10-year performance. This accommodates CalSTS’ performance reporting to the “framing effect”: a known and studied tendency of people to ground an entire deliberation in terms of the first-encountered bit of information. CalSTRS’ – and all other investors’ – ability to have an effective oversight conversation depends on having the right time frame, and reversing the order of reporting is a simple way to achieve this alignment for long-term investors.
Figure 1. CalSTRS reporting on 10-year figures
MFS Investment Management, one of the oldest asset management companies in the world, extended this principle when restructuring their reporting to their independent mutual funds board. Instead of beginning with year-to-date returns, MFS begins with the 10-year figure and dropped their year-to-date reporting altogether. This establishes a long-term frame and manages the cognitive load – another known and studied fixture of human behavior in which we are more able to engage with content when it contains less extraneous information. From Carol Geremia and Robin Stelmach, President and Vice Chair of MFS, respectively:
“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. 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.”
Federated Hermes, CalSTRS, and MFS are leaders with respect to long-term performance reporting, and many other investors are setting similar precedents with long-term mandates. These precedents 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.