Charity Investment Lecture
Cazenove Charities' fifth annual Charity Investment Lecture took place in London in May. This year’s guest speaker was Sarah Williamson, a finance professional whose career and experience give her unique insights into investment processes and practices of institutional investors, including charities.
Much of her career was spent with Wellington, the global fund manager operating from Boston. In 2016 Ms Williamson moved from there to become chief executive of FCLTGlobal, a not-for-profit organisation which exists to promote – through research, publications and other initiatives – long-term behaviours in investment and business decision-making.
She used her speech to communicate some of the key advantages that certain institutions, including charities, enjoy over other types of investor. What follows is a precis of her address.
The benefits of long-term investing are demonstrable and understood. Why then is it so hard?
The world’s capital markets owe their existence to the need for long-term savings, Ms Williamson argued.
“The reason markets exist is because individuals, charities and other institutions want to find a way of saving for long-term goals,” she said. “They need long-term ways to preserve and build value.”
Investment professionals claim to take a long-term view, she said, where in reality this was less often the case.
“The instinct of most professional investors is to be long-term. The clear consensus is that it’s right to buy into businesses where management takes a long-term view, and it’s right for you to be a long-term shareholder yourself. But if we all know this – and can see the data that lies behind it – why is it so hard to do in practice?”
One explanation Ms Williamson volunteered is that human lives are short when compared to some institutions’ objectives. Fund managers and trustees want to see returns that match career expectations (“how long will you be in that role?”). Private investors may have other objectives linked to life stages, such as paying for their children’s education or saving for retirement. These objectives are comparatively near-term.
“Real people do not have a timeless horizon,” she said. “They want to see outcomes measured over shorter periods, say three years or five."
“But if we are talking about an educational institution with a history stretching back 400 years, for example, its endowment needs to be invested on the basis that it will fund another 400 years and more. This is an almost limitless time-horizon. It calls for something very different.”
A long-term approach carries demonstrable benefits not just at the level of the portfolio creation and management. If the underlying investments are themselves businesses managed toward longer-term goals, their returns are also demonstrably higher.
Ms Williamson cited research undertaken and published last year by McKinsey Global Institute, the research division of the consultancy group. It created a systematic measure with which to categorise hundreds of quoted businesses as operating on either a predominantly long- or short-term basis. It then compared their financial performance on a number of measures over the period 2001 to 2014.
It found, on average, that businesses focused on the “long-term" grew their revenues by almost 50 per cent more than their “short-term” rivals over the period. The firms with a long-term approach also invested more in research and development than their rivals, and added more jobs during the period.
The report, Measuring the economic impact of short-termism, concluded that had all the 615 firms analysed followed the “long-term” model, an extra five million jobs would have been added during the period. The cost to the US economy of short-termism, it extrapolated, was thus around $1 trillion over the past decade.
Ms Williamson said that portfolio managers and business managers alike were liable to respond to the same sort of behavioural prompts – in particular, certain types of pay structure. Shorter-term targets result in shorter-term focus. “Incentives do what they say they do: they incentivise,” she said.
“When benchmarks and incentives focus on the nearer-term then we start to see the kind of behaviour that history shows professional and private investors are always prone to: they tend to buy the thing that just did well and sell the thing that just did badly. In other words it’s the age-old blunder of buying at the top and selling at the bottom.”
The liquidity advantage that comes with a long-term approach
Portfolios have differing liquidity requirements. If there is a need to meet potentially large and unexpected expenses a fund must be able to sell assets at short notice. This plays a role in determining the portfolio’s makeup. But liquidity has a price.
“People often fail to realise how much they pay for their high levels of liquidity,” Ms Williamson said. The “price” is in the form of the potential for higher returns available from less liquid assets – such as property, infrastructure, private equity – which are forgone.
Where the investors’ goals are truly long-term, Ms Williamson pointed out, the need for liquidity is lower – giving rise to a wider range of suitable assets and potentially higher returns.
This advantage that charities and other long-term investors can enjoy is, in fact, becoming more pronounced, thanks to another trend in the market: the diminishing number of businesses that choose to issue shares.
This trend has grown over decades and shows no sign of reversing. Since 1966 the number of companies listed on the London Stock Exchange has fallen by more than 70%*. In the US, a comparable statistics suggests the number of listed companies has halved in just the past two decades.*
Ms Williamson sees this as evidence that business growers are choosing non-public ways to raise finance, for example by selling stakes to private equity investors.
This is helpful to longer-term investors, such as endowment funds, because the nature of private-equity holdings sits more comfortably with their broader timeframes. But she highlighted a social cost. If the wider investing public is excluded from participating in the growth of new businesses, disparities that we see now within developed economies will growth further.
The ultimate goal, she maintained, is for mainstream savers to have access to liquid investments geared toward capturing long-term returns.
“If all the wealth creation is only available to the already wealthy, wealth dispersion will continue to deteriorate.”
The headlines that prompt shorter-term decision-making
Another factor that impels short-term behaviour is the scrutiny to which some fund managers’ performance is subjected by the Press and other commentators. Many charities and other institutions, however, are left alone in this regard, Ms Williamson pointed out – which is helpful.
“Investors have to make decisions for the right reasons, not because of public relations,” she warned.
“Your job is not public relations. You’re not there to think about quarterly performance or even about the next three years. Your job is to think about the next generation.”
The case that Sarah Williamson cites to prove her point
Ivy League colleges Harvard and Yale manage between them endowment funds worth over $60bn. Just as these two institutions are ferocious rivals in terms of academic standards and achievements, they are also fiercely competitive about the investment performance of their respective funds.
And in recent years Harvard’s performance has lagged. According to the latest year of published results, Yale’s fund returned 11.3% compared to Harvard’s 8.3%.
But it is not just a one-year phenomenon. Harvard, of which Ms Williamson is an alumnus, has fallen behind Yale in the longer-term, resulting in annualised growth over a period of several decades that is approximately two percentage points lower than Yale’s. Because investment gains are largely reinvested, future “losses” arising from a period of poor performance can rapidly run to tens of billions of dollars.
Ms Williamson uses the comparison to illustrate the higher returns which result when portfolio managers take a genuinely long-term view. Yale is a true long-term investor, she maintains. And – at least until recently – Harvard had failed to capitalise on their long-term investment horizon.
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.