Long-Term Investors Reduce Volatility, Improve Corporate Responsibility

Virginia Tech researchers have linked long-term shareholders to improved corporate citizenry and higher stock valuations—but profits take a small hit.

(May 6, 2013) – It's the million-dollar question: Does "responsible investing" benefit one's bottom line as well as one's conscious?

Three researchers out of the Virginia Polytechnic Institute (Virginia Tech) took on this question for public equities, and found the answer is yes.

"Our results are simple to summarize: firms with longer investor horizons invest more in stakeholder capital, which increases stock valuations not as a result of higher cash flow but rather as a result of lower cash flow risk," wrote Ambrus Kecskes (an assistant professor), Professor Sattar Mansl, and doctoral candidate Phuong-Anh Nguyen. All three work in Virginia Tech's department of finance.

The authors found that firms with greater long-term investor ownership boosted stakeholder capital investment by roughly 10%. Further, these stocks had higher valuations (market-to-book) by roughly 5%. However, according to the study, this gain in value was due to reduced volatility, not higher profits. Stocks held largely by long-term investors showed approximately 5% lower profit, sales, and cost volatility.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Future stock returns for these long-held corporations were 1.3 percentage points lower than those of stocks dominated by short-term investors.

The study was based on a data set of publicly traded US firms covering the years 1991 through 2009. Kecskes, Mansl, and Nguyen divided investors into short-term and long-term, depending on the frequency that they turned over securities. Corporate responsibility scores from analytics firms KLD measured the extent to which each corporation invested in "stakeholder capital", producing positive outcomes for their employees, environments, and communities.

"We conclude that firms with longer investor horizons invest more in stakeholder capital, which increases shareholder value as a result of a decrease in risk," Kecskes, Mansl, and Nguyen wrote. "Taken as a whole, our findings suggest that long-term investors can ensure that firms do well for their shareholders by doing good for their other stakeholders."

Read the full study, "Can Firms Do Well for Shareholders by Doing Good for Stakeholders? The Importance of Long-Term Investors," here.

(May 6, 2013) - Investors would have been better off with public equity indices than private equity investments for the year ending September 30th, 2012, according to Preqin's most recent figures.

Over those four quarters, the tracked private equity firms in aggregate returned a solid 13%. The S&P 500, however, more than doubled that performance, with gains of 30.2%.

Public market returns were not quite so strong for stocks in the non-American indices-but they still topped private equity. The MSCI Europe grew 17.3%, and the MSCI Emerging Markets index added 16.9%.

Preqin's data covers the net-to-limited partner performance of over 6,200 private equity funds spanning a range of strategies and geographic focuses. According to the firm, its research takes into account 70% of the funds ever raised by the industry in terms of aggregate value.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The data shows buyout funds having the strongest one-year period of any other major strategy, returning 15.8%. Buyout-focused managers have in fact been on top for the last decade: Preqin's data places the strategy above venture capital, fund of funds, and mezzanine capital for 3-, 5 -, and 10-year returns.

"Returns from buyout funds and all private equity follow each other closely," the report noted. "With buyout funds accounting for the largest amount of capital in the private equity industry, it is no surprise to see such a high correlation. Venture funds follow a similar pattern but to a lesser extent, with smaller losses during the downturn and smaller gains once the industry began to recover."

Mezzanine has been the weakest performer, with one-year returns of 3.6% and gains just shy of 10% over the three years ending in September, 2012.