We have been proudly investing the Canada Pension Plan Fund for 25 years, helping ensure that more than 22 million Canadians have financial security in retirement.
Geoffrey Rubin, Senior Managing Director and One Fund Strategist at CPP Investments, has long been a passionate advocate for long-term investing. On the latest episode of Chartered Alternative Investment Analyst (CAIA)’s Capital Decanted podcast, Rubin and Sarah Williamson, CEO of FCLTGlobal*, join hosts John Bowman and Christie Hamilton to discuss the “siren song” of short-termism, the organizational culture needed to support long-term investing, and why long-termism is about more than just holding investments over extended periods.
The following has been edited for clarity and brevity.
You’ve got a succinct and pragmatic way of defining long-termism. Can you share it?
Geoffrey Rubin: We’re of the view that an investor’s horizon is the length of time that they can stay committed to a strategy despite adverse but foreseeable investment outcomes or changes in their organizational circumstances.
That kind of horizon is going to depend on a number of internal and external factors. We know as risk takers, not every strategy is going to perform exactly as hoped. But if it’s performing within reasonable bounds of expectations, do you face challenges in your ability to stay in that strategy? Investors with truly long horizons can avoid getting “stopped out” of otherwise sound strategies that are incurring short-term volatility.
I’ve heard you distinguish between the verb and the noun, long-term investing versus long-term investments. What do you mean by that?
Geoffrey Rubin: There are certain investments with characteristics typically considered long-term, such as investments that look to accumulate value over time. I think those investments can be important to long-term investment strategy, but not exclusively so.
When we did our work on long-horizon investing, we started by asking ‘how can we introduce more long-horizon investments into our portfolio?’ We ended by asking, ‘how can we act as a more effective long-horizon investor?’ Real long-horizon investing can be applied both to long-horizon investments and to investments without those characteristics. We believe that the hold period or investment horizon is not as significant a factor in being a long-horizon investor as the ability to maintain a strategy that can endure and adapt across different market cycles.
That depends on a lot of things. At the top of the list is the quality and substance of governance. We look at the nature of funding and the liability structure. Performance evaluation, including the horizon over which performance is assessed in comparison with peers, can also have a big impact, along with the rigour of the ex-ante investment thesis. The better job you do in setting up your strategy in advance, with very clear understanding of the drawdowns or poor outcomes you might face over time, the better you can steel yourself for when volatility inevitably arrives.
One thing we realized is we have the inherent opportunity to be a long-horizon investor, an opportunity greater than that of many other investors. But we have to do a lot of things in order to convert on that possibility.
What are the benefits of building that long-term philosophy of investing?
Geoffrey Rubin: Two examples come to mind. One is the quality of our partnerships with external firms. Maintaining a long horizon and a commitment to strategies means you can more effectively commit to your partners, elevating those relationships from purely transactional to more strategic. That’s been a big driver of our performance over time, these heightened long-term relationships and the advantaged deal flow and exposure we have from them.
The second is the success of our global offices and investment portfolio. The success of the teams and the presence they have in those marketplaces would be radically different without a long-horizon commitment to those markets.
What are some of the governance pillars and philosophy processes that you would recommend for creating proper long-term thinking?
Geoffrey Rubin: You want deeply present governance that’s focused on the elements and drivers of your chosen strategy, and that understands and appreciates how that strategy might play out over time. There’s always going to be risk, but you can equip your governance with a better understanding of what it’s going to look and feel like.
Organizations in which the board and management are jointly accountable and responsible for the entirety of the investment portfolio can effectively stay on top of the longer-term considerations of the strategy. A governance construct in which the board approves a longer-term strategic asset allocation and management is responsible just for shorter-term performance against that policy portfolio, or a benchmark, can undermine management’s focus on the longer horizon and ability to invest in those ways.
We benefit from a terrific legislative construct here, but not all organizations do. Everything we’re talking about is reasonably aspirational for many institutions to stretch their horizons over time, but it might not be possible given the governance constructs. Worse than being a short-horizon investor is convincing yourself you are a long-horizon investor when you’re not. You’ll pursue strategies that rely upon that consistency and, if that commitment is not there, get stopped out at exactly the wrong time. Stretch the horizon, work really hard to do so, but at the end of the day, make sure your strategies are tuned to the horizon you actually have.
One of the great myths is that long-termism is blind buy and hold. How does long-termism co-exist with the ability of your investment team and board to shift and take advantage of structural changes at those inflection points?
Geoffrey Rubin: We need to be thoughtful about the evidence we’re getting on strategies, acknowledging that conditions change and strategies forged in the best possible beliefs and assumptions might, over time, start to genuinely degrade. The ability to adjust our strategies and portfolios for those emerging conditions doesn’t run counter to being a long-horizon investor.
When we talk about things like tactically shifting the portfolio, having a long horizon is vital to the success of those kinds of strategies. The organization that is going to lose its commitment to tactical strategies in the face of some bad downturns would be cautioned against getting into them in the first place, because those are exactly the types of strategies that can show significant volatility over shorter periods, even if we believe there is a longer-term advantage.
*FCLTGlobal is a non-profit organization that develops research and tools that encourage long-term investing. It was founded in 2013, as a joint initiative of CPP Investments and McKinsey & Company. John Graham, President and CEO of CPP Investments, is the current chair of the organization.
With valuations to future earnings stretched, a strong showing will be needed to keep the rally going.
Article
May 16, 2024
{:en}
The FANGs. The FAANGs. The Magnificent 7. American tech stocks have all but dominated headlines over the last year—with each new group generating a fresh buzz-worthy name. The latest classification of highfliers? The Fab Four—Nvidia, Amazon, Meta, Microsoft.
As we look to the next fiscal year, it’s worth taking a step back to compare performance against the hype. Stocks closed the first quarter of 2024 near all-time highs across developed markets, with the S&P 500 trading over 5200. While the popular narrative points to AI-driven stocks alone powering this performance, a closer look dispels that notion. The S&P 500 is market cap weighted—which means it puts more emphasis on the biggest names. The SPW index also tracks the constituents of S&P 500, but with equal weights. Viewed this way, the rally in stocks that followed pandemic lows relied not just on the darlings of the tech sector but on the whole market. Indeed, all sectors participated in it at one time or another.
Now, with valuations to future earnings stretched—the SPX 2024 Year-End – Forward PE is trading at 21.7—what will it take to keep the rally going? As investors seek new reasons to keep buying, all eyes will undoubtedly turn to earnings—and whether corporate profit growth can justify current market pricing. So far things are looking good: most U.S. companies have now reported first-quarter results, which show profit growth picking up.
—Varun Sharma, Managing Director, Exposure Management, Total Fund Management
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Les groupes FANG et FAANG ainsi que les Sept Magnifiques. Les titres technologiques américains ont tous dominé à leur tour les manchettes dans la dernière année, chaque nouveau groupe prenant le devant de la scène sous une nouvelle appellation. Le tout dernier groupe de meneurs de marché qui a vu le jour se prénomme les « quatre fantastiques »; il s’agit de Nvidia, d’Amazon, de Meta et de Microsoft.
En ce qui concerne le prochain exercice, il y a lieu de prendre du recul pour évaluer si le rendement sera à la hauteur, au vu de l’engouement que suscitent les titres défrayant la chronique. Les actions ont clôturé le premier trimestre de 2024 près de leurs sommets historiques dans les marchés développés, alors que l’indice S&P 500 a franchi le cap des 5 200 points. Même si, selon l’opinion populaire, ce sont seulement les actions axées sur l’intelligence artificielle qui sont à l’origine de ce rendement, un examen plus attentif permet d’écarter cette idée. L’indice S&P 500 est pondéré en fonction de la capitalisation boursière, et l’accent est donc mis sur les titres les plus importants. L’indice SPW suit également les composantes de l’indice S&P 500, mais ces dernières affichent des pondérations égales. De ce point de vue, la remontée des actions qui a suivi les creux attribuables à la pandémie a été le fait non seulement des titres les plus prisés du secteur des technologies, mais aussi de l’ensemble du marché. En effet, tous les secteurs ont participé à ce redressement à un moment ou à un autre.
Maintenant que les évaluations en regard des bénéfices futurs sont élevées – le ratio cours/bénéfice prévisionnel du SPX est de 21,7 pour 2024 – que faudra-t-il pour que la remontée se poursuive? À mesure que les investisseurs chercheront de nouvelles raisons de continuer à acheter, toute l’attention sera sans aucun doute portée sur les bénéfices – et la question de savoir si la croissance des bénéfices des sociétés peut justifier les prix actuels du marché. Tout va bien pour l’instant, alors que la plupart des sociétés américaines ont publié leurs résultats pour le premier trimestre, qui montrent une reprise de la croissance des bénéfices.
– Varun Sharma, directeur général, Gestion de l’exposition, Gestion de fonds globale
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Institute Dialogue: Priti Singh and Diana Scott
CPP Investments’ Senior Managing Director and Global Head of Capital Markets & Factor Investing discusses the current discourse around
Video
April 5, 2024
The Factor Lens
Investors are used to walking a tightrope of risk. But the current landscape of heightened geopolitical conflict, climate change and
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In the U.S., women in the early stages of their careers account for a larger share of managerial roles than ever before.
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