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ResearchMay 23, 2024

Pension Investors Can Improve the Productivity of the Companies in Which They Invest

Productivity improvements happen across ‘four channels’ due to direct equity stakes from asset owners, research finds.

By Matt Toledo

Updated with correction

New research from the International Centre for Pension Management suggests that direct investments in companies by a pension fund can positively affect the company’s productivity. The findings were released in a white paper titled, “The Four Ways Through Which Pension Funds Increase the Productivity of Firms They Invest In.”

The ICPM paper analyzes another recent research paper based on Danish data, which found that pension fund investments can increase a firm’s productivity by 3%-5%. European pension funds, like Canadian ones, are more likely to make direct investments in companies, unlike U.S.-based funds, which typically invest in companies via allocations to private equity managers.

The paper identifies four “channels” in which a pension fund equity stake influences the productivity of a firm;

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Supply of funds: An increased supply of funding may allow a company to make productivity-increasing investments, which it otherwise could not;
Long-term commitment: Because pension funds are such long-term investors, they favor investments with long-term objectives rather than investing in companies with short-term projects and do not have the need to improve margins on a short-term basis, this can allow companies to focus on long-term research and development;
Engagement: An investment from a pension fund tends to improve the governance of a company, through engagements like changing a company’s management and strategy, and taking a seat on the board of a business and providing it expert advice; and
The signaling effect: An investment from a pension fund can give a positive signal to other financiers to also invest, and a firm with a good reputation can attract even further outside investment.

According to the white paper, a company’s productivity is more affected when a pension fund holds a larger stake in the firm and when that stake is held over a long period of time. The paper notes that because pension funds invest over such a long horizon, their supply of funds, long-term commitment and engagement channels can operate simultaneously with a firm over a long period.

These synergies, which the paper refers to as “patient capital,” take time to materialize. Other long-term investors, such as insurance firms and sovereign wealth funds, are some of the few investors that might have a similar effect on businesses in which they invest.

The white paper was written by ICPM’s Working Group, which consists of academic figures and senior officials of several Dutch, Danish and Canadian universities and pension funds such as PSP Investments, APG Asset Management, PGGM, CPP Investments, McGill University, University of Amsterdam, University of Toronto, Copenhagen Business School, PensionDanmark and others.

Examples in Action

The white paper provides case studies in which a company’s productivity was increased across all four channels due to an investment from a pension fund. In May 2021, PensionDanmark made a nine-figure investment in cleantech company Stiesdal, a manufacturer of offshore wind foundations, energy storage tech and other clean energy technologies.

As a result of the investment, Stiesdal had funding for its capital-intensive manufacturing operations, PensionDanmark’s long-term focus meant the business could focus on research and development for new and unproven technologies, which resulted in productivity improvements through the supply of funds and long-term commitment channels.

The fund’s investment in the company not only provided long-term financial support, but also signaled to other investors and potential customers the company’s potential, representing the signaling effect. PensionDanmark deployed experienced management to the company, holds a seat on the board and improved the company’s governance, which represent improvements through the engagement channel, the paper stated.

The working group authors of the report include Roel Beetsma, Sebastien Betermier, Jaap van Dam, Svend E. Hougaard Jensen, Felix Lanters, Mark Lyon, Allan Lyngsø Madsen, Michael Neft, Flo Pattiwael, Andrew Reeve, Alexandre Roy, William Scott and Mikhail Simutin.

How to Invest in a Disrupted Economy, Per Sage Munro

War, expanding debt and high rates demand a multi-strategy approach, says chief of BNY Mellon’s Newton unit.

By Larry Light

The economic landscape has been upended in recent years—owing to higher inflation and interest rates, ballooning debt, geopolitical tensions and a host of other factors.

What is the best way for institutional investors to deal with such a changed world? The answer, according to Euan Munro, CEO of Newton Investment Management, is a multi-strategy approach capable of shifting as the ground does. This covers an array of methods, such as income-centered (bonds and dividend stocks) and absolute return (involving short selling, derivatives, leverage and more).

Many of the old tried-and-true investing methods are or soon will be in decline, he asserted. For instance, the longstanding investor preference for passive, index-based investments will increasingly be seen as mistaken, Munro said in an interview. “Indexes are backward-looking,” which is a problem for future planning, he argued.

Examples: In the 1990s, tech and telecom were heavily represented in the indexes, a weakness when the 2000 dotcom bust occurred. And in the aughts, banks and other financial companies were the big thing, then came the 2008 financial crisis.

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Up ahead, economic growth in developed nations likely will slow, he wrote in a research paper, issued in April, “How Can We Unlock Opportunity in a New Market Regime?” Reasons included greater allocation of these nations’ financial resources to “‘greening’ [the] energy and transportation sectors, and a lower percentage linked to consumption.”

Prominent new emerging trends, wrote Munro, whose firm is a unit of BNY Mellon Investment Management, are increased immigration, shifting trading patterns and smaller working-age populations. These all are “raising the bar on inflation,” he noted. London-based Newton, founded in 1978, now has $110 billion in assets under management, and offices in New York, Boston, San Francisco and Tokyo. Munro joined as CEO in 2021, after holding top roles at several U.K. financial firms.

To deal with the myriad new problems, governments are boosting spending for defense, addressing climate change and “social support,” paid for by adding debt, Munro found. Plus, he added, central banks will no longer be inclined toward “aggressive monetary easing in response to economic downturns.”

Further, stock market cycles will grow shorter, he opined: “Higher inflation and higher rates may create a tendency for markets to trend up and then reverse quickly.”

There already is some evidence for this rapid market fluctuation. The S&P 500 interrupted a long post-pandemic bull run with a big slide in 2022, as the Federal Reserve started to tighten. More recently, a recovery rally fell apart in April 2024 amid heightening concerns over inflation—concerns that have abated thus far in May.

As “prolonged periods of upward-trending markets look to have ended,” he wrote, “capital that has a permanent exposure to market beta may be vulnerable.” So strategies that follow market indexes can be expected to render lower performance than in the past.

In addition, using correlations between different stocks, when constructing a portfolio, also will become outmoded. “Investors exposed to markets will increasingly look for returns that do not rely on trending markets,” Munro contended.

In light of the changing situation, Munro recommended that quantitative capabilities be at the center of researching fresh investing directions. He advocated moving to broad array of strategies to be used in different circumstances, such as the thematic approach, which encompasses income, absolute return and balanced (divided between equities and debt) strategies, among others—and rests on researching macroeconomic, geopolitical and technology trends.

Munro admonished in his paper that “investors are facing a very different regime and are unlikely to see a return to the benign conditions of the previous decade.”