Must Try Harder: Long-Termism and Governance Still Lacking, Study Finds

Investors are paying lip service to long-term investing and there is room for significant improvement across the board, say two influential consultants.

Pension funds and other major investors are failing to act sufficiently to promote good governance and long-term investing, according to a new study.

KPA Advisory co-founders Keith Ambachtsheer and John McLaughlin this month published two reports in tandem, using data from a survey conducted in June 2014. They found there had been some improvement in governance of pension funds and other major investment institutions, but many “major concerns” still remain.

“Despite evidence that board effectiveness is marginally improving, much work still needs to be done.” —Keith Ambachtsheer and John McLaughlinThe authors also reported a significant gap between the long-term investment aspirations of asset owners and the reality of their strategies’ implementation. The two areas are very likely linked, they added, as there were “statistically positive relationships between the governance quality rankings and the long-horizon investment quality rankings.”

Ambachtsheer and McLaughlin’s studies followed a “Focusing Capital on the Long Term” initiative launched in 2013 by Dominic Barton, global managing director at McKinsey, and Mark Wiseman, CEO of the Canada Pension Plan Investment Board.

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Barton and Wiseman’s initiative was aimed at promoting long-term investing and identified governance as key to its success.

Ambachtsheer and McLaughlin updated previous governance surveys to add force to the initiative, quizzing 81 major pension funds with total assets in excess of $5 trillion.

“Despite evidence that board effectiveness is marginally improving, our survey-based study conducted in 2014 finds that much work still needs to be done,” the authors wrote.

Among their governance concerns, Ambachtsheer and McLaughlin listed “flawed” board selection processes, unclear board oversight functions, and uncompetitive pay packages hampering recruitment and retention of talent.

“It will require a concerted, ongoing joint effort by pension plan stakeholders, pension organization boards, regulators, and legislators to change the current situation,” the pair said.

On long-term investment, the authors said there was “broad consensus” among respondents to the survey that a longer investment timescale was “a valuable activity for both society, and for their own fund.”

“A concerted effort—both inside pension organizations and among them—will be required to break down these barriers.”“However, there is a significant gap between aspiration and reality to be bridged,” Ambachtsheer and McLaughlin added.

“Here too a concerted effort—both inside pension organizations and among them—will be required to break down these barriers.”

The authors listed the barriers to long-termism: some areas of regulation, a “short-term, peer-sensitive environment”, a lack of clear investment processes and performance metrics, and difficulties in aligning interests with outsourcing providers.

The full paper can be accessed here.

ScottChan_TimBower Art by Tim BowerThe University of California’s (UC) investment office has further deepened its bench with the addition of Sacramento County pension chief Scott Chan, CIO has learned.

Chan has been named senior managing director of public equity, responsible for upwards of $35 billion in endowment, retirement, and operational assets.

The former hedge fund manager took over the Sacramento County Employees’ Retirement System in 2010. Under Chan’s leadership, the $7 billion portfolio climbed from five-year returns in the bottom quartile of public plans to the 53rd percentile as of September 30, 2014.

He spearheaded several opportunistic plays, including a separate account for purchasing discounted infrastructure secondaries. Last month, Chan and the fund took home the CIO Industry Innovation Award for public plans under $15 billion.

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Chan is scheduled to begin the new role on February 17.

In addition to filling the public equity post, CIO Jagdeep Bachher has promoted real estate specialist Cay Sison from investment officer to director. Sison also arrived at UC from a California public pension, having spent a decade as an analyst with the Los Angeles County Employees Retirement Association.

Sison and Chan join more than 14 new hires and promoted staff members that have entered new roles at UC’s investment office over the last few months. Several professionals have also retired or left during this period.

Bachher, who took over as CIO in April 2014, has executed a nearly wholesale overhaul of the division’s staff, organizational structure, and compensation scheme.

Identifying and promoting internal talent was his first step in the reorganization, the Canadian sovereign wealth fund alum told CIO in November.

“Second,” he said, “you need to bring in external people. Target those with experience who’ve had leadership roles. Hence, CIOs at other institutions who want to go back to investing have been very attractive.”

External Hires:

Scott Chan, Senior Managing Director, Public Equity (ex-Sacramento County Employees’ Retirement System)
Arthur Guimaraes, COO & Associate CIO (ex-AIMCo)
Brian Gibson, Senior Investments Advisor to the CIO (ex-AIMCo and Ontario Teachers’)
Ashby Monk, Senior Advisor to the CIO
Sam Kunz, Managing Director, Asset Allocation & Investment Strategy (ex-CIO of the Policemen’s Annuity and Benefit Fund of Chicago)
Niclas Winterstorm, Director, Operational Risk Management (ex-Norges Bank Investment Management)
Lindsey Adams, Director, Real Estate (ex-San Francisco Public Employees’ Retirement System)
Jessica Hans, Senior Investment Analyst, Private Equity & Real Assets (ex-Monsanto and Blackstone)
Matt Webster, Senior Investment Analyst, Private Equity & Real Assets (ex-Chertoff Group)
Sheng-Sheng Foo, Senior Investment Analyst, Public Equity (ex-California Endowment, a $3 billion foundation)
Thomas Fischer, Investment Officer, Real Estate (ex-Otto Finlay Investment, a real estate operating company)

Promotions:

Cay Sison, Director, Real Estate (formerly Investment Officer)
Paul Teng, Director, Deputy Head, & Acting Head, Public Equity (formerly Investment Officer)
Edmond Fong, Managing Director, Cross Asset Class Investments (formerly in absolute return unit)
Susie Ardeshir, Investment Officer

Exits:

William Coaker, Senior Managing Director, Public Equity (now CIO of San Francisco Employees' Retirement System)
Mel Stanton, Deputy CIO (now retired)
Peter Taylor, CFO (now president of a private foundation)