There may be a way to predict which asset management firms will actually deliver over the long term.
FCLTGlobal — an advocacy group for long-termism led by entities including BlackRock and the Canada Pension Plan Investment Board — on Monday published a report identifying behaviors which it says can predict long-term success for asset managers, asset owners, and public companies. The study included large, publicly traded companies featured in MSCI’s all-country index; asset managers representing $45.6 trillion under management; and nearly 200 pension and sovereign wealth funds.
Among asset managers, one factor stood out as having the most explanatory power behind five-year returns: Employee ownership.
“Asset managers with the strongest long-term gross returns tend to have a high level of employee ownership, which may help to align incentives,” the report stated. FCLTGlobal looked at the trailing five-year returns of 789 asset managers between 1997 and 2017, using data from eVestment.
Another factor that was linked to higher five-year returns — albeit less strongly — was net inflows from clients. “This finding may reflect the ability of successful managers to attract money — rather than any tendency for growth to improve returns,” the report noted.
On the other hand, high turnover among portfolio managers and large numbers of active strategies predicted lower long-term value creation by asset management firms.
However, the predictive power of the factors identified by FCLTGlobal was not consistent across the asset management industry. Both employee ownership and portfolio manager turnover were stronger predictors for equity managers than fixed-income managers, which also experienced less variety in returns overall.
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When it came to studying asset owners, FCLTGlobal admitted that the research was constrained by limited availability of data on asset owners. Still, the non-profit identified a handful of factors it said were collectively associated with higher long-term returns, and one factor which was definitively tied to lower value creation over time.
“Net returns may be connected to a suite of strategies and behaviors that include gender diversity on the board, strategic engagement, lower costs, a higher funded ratio, and higher exposure to both public and private equity,” the report stated. On the flip side, high fees and operating expenses were tied to worse performance over time.
Factors that were linked to a higher return on invested capital for corporations included greater levels of fixed investment, the productivity of spending on research and development, higher sales growth, and more shares held by long-term investors.
Predictors of lower long-term performance among publicly traded companies included excessive dividends and stock buybacks; controversies over environmental, social, and governance issues; and high leverage. Companies that issued short-term guidance also tended to perform worse.