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 Kempen Capital Management.
Kempen exemplifies ways that asset managers can lead the way on long-term mandates, despite often being in a position of clients having their own preferred terms. It has negotiated long-term mandates with clients, and Kempen is the client in other relationships because of its fiduciary management business (e.g., manager-of-managers). Kempen Chief Investment Officer Lars Dijkstra describes the precedents it is setting with long-term investment mandates in the interview below:
FCLTGlobal: Thank you, Lars, for the precedent that Kempen sets using long-term mandate provisions – and for sharing that precedent with us. We’re excited to hear your story because there is a common impression that asset managers are limited just to accepting clients’ preferred terms and therefore cannot lead in this area. Has Kempen been able to integrate long-term provisions into mandates with clients?
Dijkstra: We look to apply a long-term perspective across all of our investment business, both directly and via external managers. Kempen’s core philosophy is acting as long-term stewards for our clients’ capital, and that is evident in several long-term provisions that we routinely use in our direct relationships with clients.
For example, in a number of instances we offer loyalty-related fee reductions so that client costs decline the longer that a client remains invested with us.
Another simpler provision that we commonly use is to emphasize longer-term performance first in our reporting to clients.
Active ownership and engagement also are essential to us, and we communicate very clearly with clients about how we have voted their shareholdings in individual companies through our proxy voting portal.
FCLTGlobal: Kempen also offers fund-of-funds, which entails hiring sub-managers. What long-term provisions do you have in mandates in which Kempen is the client?
Dijkstra: Being a €70bn+ allocator on behalf of our clients is an advantage and helps us to shape terms: fees, structure, and approach to stewardship and sustainability.
Managers sometimes can be reluctant to try new fee arrangements, but we have found a good bit of success in this area. Kempen has benefitted in several instances from the same sort of loyalty discount that we offer to clients, in which fees step down over a multi-year period. There also have been instances in which we invested in a founders’ class whose fees step down as the AUM reaches certain thresholds. In effect, this is another way of being rewarded for longevity. Finally, in some less-liquid funds, the performance fees that we pay are backdated. The manager realizes those fees in line with the liquidity cycle of the fund.
Kempen then looks for evidence of a long-term focus in the structure of our relationship with external managers. Our research team will approve managers only at the end of an extensive research process. One good test of whether someone actually walks the walk is to check turnover in the portfolio. That should be really low: 5-10% annually is not uncommon since the general expectation is to hold shares for 7 to 10 years. This relationship-building assessment also extends to sharing our beliefs in avoiding investments in cluster munitions and tobacco. Structuring of a mandate clearly will vary according to asset class, but Kempen maintains the broader principle of acting as a long-term steward in all of them.
Stewardship and sustainability also are essential to Kempen, and this is evident in part from the active ownership and engagement practices that we expect from sub-managers. We expect a dialogue between the sub-manager and the company. Long-term shareholders often outlast individual executives, or even several cycles of executives. Part of this dialogue is about impressing a solid ESG awareness on companies’ management teams, in particular noting how an ESG mis-step compromises your license to operate. Reciprocally, we expect sub-managers to know the companies in which they invest and to invest in high quality companies: those with a healthy balance sheet, solid management, and understandable business model.
FCLTGlobal: When did Kempen begin using mandate provisions specifically for their long-term effect?
Dijkstra: Kempen was incepted in 1990, and we began immediately managing our long-term European small-cap fund with a 5-10 year horizon buying 5-10% stakes in companies. This fund only has stakes in 20 companies, which means we are a long-term engaged shareholder by design. The fund is obviously less liquid, and we need to find clients who really understand this well. We introduced a similar large-cap strategy in 2017, the European Sustainable Value Creation strategy. One of our larger fiduciary pension fund clients co-created this with us.
FCLTGlobal: Can you share that story with us?
Dijkstra: This Dutch industry-wide pension fund sought to invest specifically in relation to selected UN Sustainable Development Goal (SDG) impacts. The client had initially searched the market for a suitable vehicle but realized that nothing was available that would allow them to meet their objectives, and so we engaged with them to develop a Global Impact Strategy that drew on our in-house expertise in responsible investment, private markets manager research, portfolio management, and product design.
We already run a long-term mandate for the same client, but it is more general: we agreed to a fee discount in exchange for their support creating the strategy. They agreed because they were looking for a low-cost, ESG-integrated equity strategy, and that’s what Kempen does.
Having this foundation to the relationship was very important when the opportunity came up to create the Global Impact Strategy. Our partnership is built on the shared belief of the importance of integrating ESG and thinking long-term. This is bigger than any single investment product, and they could trust us to implement such a customized strategy, including a concentration with only 35 companies and a 5-10 year investment horizon.
FCLTGlobal: Thank you so much for sharing these precedents with us. Are there any thoughts that you would offer in conclusion?
Dijkstra: It’s all about aligning with the client’s objectives. The individual mandate terms are part of a broader toolkit, some parts of which will be relevant depending on the client, their objectives, and the characteristics of the asset class – others less so. Kempen finds packages that work for all parties in the various ways that we combine long-term mandate provisions. Clients clearly value the overall package for the alignment of interest and time horizon that it creates and for the understanding of investment objectives from the outset.
Kempen is a leader with respect to long-term mandates, and many other investors are setting similar precedents. 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.