The Contract Provisions Allocators Can Use to Keep Their Managers Focused on the Long Term

FCLTGlobal suggests incorporating loyalty fee discounts, making changes to performance reporting, and integrating net-zero commitments.

Jason Alden/Bloomberg

Jason Alden/Bloomberg

FCLTGlobal, a nonprofit that promotes long-term investing, has provided new guidance to help asset owners and managers make longtermism a more concrete part of their investment relationships — by putting it in their contracts.

The organization, which counts Bridgewater and the Washington State Investment Board among its members, has released an updated toolkit for asset owners and their managers to ensure that their contract provisions reflect the ultra-long-term nature of their mandates.

This is the third version of FCLT’s toolkit, which it created after multiple working groups with members. The latest toolkit has integrated ESG-related considerations, provisions for comingled funds, and additional tools for the due diligence process and ongoing manager monitoring.

“The contract is important,” said Joel Paula, research director at FCLT, by phone. “It has to be right, but there’s a number of things that happen around that which focus on the long term. That’s why we added a piece on due diligence. It’s about finding the right match in the beginning.”

The due diligence questionnaire included in the toolkit covers the repeatability of investment strategies, their proxy voting policies, and engagement on long-termism with policymakers and associations. According to Paula, FCLT intends for the questionnaire to elucidate issues that would be concerning to allocators before they reach the contract negotiation stage.

The toolkit also includes a matrix that compares status quo contract provisions to the long-term model FCLT has laid out. Fees, for instance, are usually asset-based or focused on performance.


“It’s so widespread to use the asset-based fee model, “ Paula said. “Sometimes an asset-based fee can encourage asset gathering.”

FCLT instead proposes discounts for mandate or relationship longevity or calculating performance fees over three to five years with deferrals, rather than clawbacks. “This is really to reward a longer-term relationship,” Paula said.

Some of FCLT’s members have already implemented this model. Investment manager Kempen, for instance, offers loyalty-related fee reductions so client costs decline if clients remain invested. Ontario Teachers’ Pension Plan has also added loyalty fee discounts to its standard long-only investment management agreements.

FCLT also challenges at-will contract terms, instead suggesting that three- to five-year contract terms with broad discretion to terminate could keep allocators invested through periods of turmoil. Having these provisions “can help [investors] get past some turbulent periods and be on schedule to re-evaluate instead of being reactive,” Paula said.

He added that the manager scorecard, which is included in the toolkit, encourages allocators to evaluate not only investment returns, but also other “leading indicators of a manager’s ability to drive value.”

“We hope it deemphasizes or changes that conversation,” Paula said.

Even small changes like reversing the order in which performance is reported (with the longest period first, on the left of the page, rather than last) can have an impact, according to FCLT. Kempen, MFS Investment Management, and Ontario Teachers’ Pension Plan use this approach to reporting.

The toolkit also places a special focus on net zero commitments; diversity, equity, and inclusion practices; and other ESG-related strategies. FCLT suggests that managers could add a climate impact benchmark or align contract lengths with the net zero goal.

“We wanted to capture these responsibilities in the way that investment mandates are designed,” Paula said. “Our terms are meant to be adaptable. They can be used by an investor any way they see fit.”