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Using tuition fees to plug the Universities Superannuation Scheme’s £17.5bn pension deficit is a clear example of how the transfer of wealth from young to old presents a real threat to long-term societal and economic sustainability.  The fact that the Universities Superannuation Scheme (USS) gained an impressive 20.1% in 2016-17 and meaningfully cut costs has been largely overlooked in the press. Focus has instead centred on the growing deficit, which reached £17.5bn, making it the largest pension black hole in the UK. While I can empathise with USS’s dilemma - despite generating 12% returns a year over the last five years, the staggering growth in their liabilities has been largely driven by falling interest rates and lower yields on UK government bonds, factors that are outside the scheme’s control - it raises alarm bells about the long-term prospects for Britain’s economic and societal sustainability. The scheme has yet to make clear how it plans to plug that hole, but in the meantime, experts have pointed to tuition fees as part of the solution. The options being presented are that either fees have to go up, or fees stay the same, but more money is diverted away from teaching to fund the pension promises made to USS’s 390,000-strong academic membership.
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Long-term companies provide superior financial returns, better fundamentals and a more positive impact on the economy and society. Fund managers, in turn, need to take a longer view, exploit the outperformance offered by long-term firms for the benefit of their clients, and encourage more corporates to think long-term.  A few days ago I was chatting to a fund manager at one of the biggest UK fund houses. There was gin involved so I can’t recount the whole conversation word for word, but he did say something that stands out. We were talking about the need for long-term investors to consider the wider implications of their allocation decisions and think long-term – or at least this was what I was banging on about – when he said: “I see a 20 year investment horizon as a collection of 4-5 year investment horizons. There is what we ‘should’ do, and then there is being pragmatic.”
This got me to thinking: Does pragmatism force investors to take a short-term view? Not according to the McKinsey Global Institute. Their report Measuring the Economic Impact of Short-Termism, issued a day after my conversation with this fund manager, summarised the findings of their research thus: “Our new Corporate Horizon Index provides systematic evidence that a long-term approach can lead to superior performance for revenue and earnings, investment, market capitalization, and job creation.” The report rolls from one finding in support of long-termism to another: long-term firms exhibit stronger fundamentals, growing their revenue cumulatively 47% more on average than other companies and in a less volatile manner, allowing them to weather the financial crisis better; they continue to invest in difficult times, spending significantly more on R&D, which helps them maintain consistent and sustainable sources of growth - key goals of long-term planning (see charts below).  Snap's IPO plans demonstrate why the ISG's Framework for US Stewardship and Governance is so desperately needed.
As if to demonstrate why a stewardship and governance code is so badly needed in the US, Snapchat’s IPO plan, designed to raise $3bn for the company, will only offer shares with no voting power (today’s FT). The Council of Institutional Investors has 'strongly urged' Snap to reconsider, while Calpers criticised Snap's ‘banana republic-style' approach. Their concerns are well founded.  The Investor Stewardship Group’s Framework for US Stewardship and Governance comes as very welcome news among the melee of negativity flowing out of the US over the last week.
The collective clout held by the group of 16 US and international institutional investors representing a combined total of just over $17 trillion is very considerable and sends a very strong message to corporate America about how investors expect them to behave. I’ve heard a lot of fund managers and investors complain in recent weeks about the lack of ESG frameworks in the US, which has made it harder to hold companies to account and get them to engage. In no small part, this has been to blame for the significantly higher levels of executive pay Amercian CEOs still enjoy relative to their global peers. Data from MSCI shows that for companies included in the MSCI World index, US CEOs' average total compensation far exceeds that of their international rivals. |
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