This report provides a framework and practical steps for how institutional investors might reorient their portfolio strategies and management practices to emphasize long-term value creation and, by doing so, be a powerful force promoting a long-term mind-set throughout the investment value chain. Institutional investors are defined as asset owners, including pension funds, sovereign wealth-funds, mutual and other investment funds, and life insurance companies; and asset managers, including investment-management firms and internal portfolio managers at asset owners.

The five core areas of the framework are:

Investment beliefs

Investment beliefs are tenets and principles based both on conviction and fact. If used diligently, it can provide the institutional investors with navigation through short-term turbulence, a compass to address particular investment strategies in the long term, as well as establishing an investment philosophy, ultimately leading to a steady position when addressing decision-making at every level.

Reasons to hold investment beliefs:

• Help investors define a sound investment process that is relevant to their circumstances;
• Encourage long-term investors to look past short-term market prices and focus on long-term fundamentals;
• Translating beliefs consistently into processes and practices helps investors combat behavioural biases that distort rational decision-making;

Investment beliefs that a long-term investor may wish to adopt and adapt:

• Focus on the fundamental drivers that affect the underlying value of a business or investment;
• Market prices deviate significantly from a fundamental or intrinsic value in the short run;
• Market returns show short-term momentum but a longer-term tendency for revision to the mean. Market prices reflect short-term news more fully and accurately than long-term trends;
• Long-term investors can benefit from their ability to buy and sell at any time without compulsion and can reap the rewards of long-term outcomes whose short-term path is uncertain.

Risk Appetite Statement

Managers must be able to manage and accept the risks when dealing with long-term investments. By developing a risk appetite statement (RAS), it can help the investor to address the material risks in executing the strategy that is guided by their investment beliefs. The RAS outlines the key risks, risk appetite and risk measures, that are appropriate to the organisation and oriented to the long term.

Benchmarking process

Benchmarking is an important concept to measure the success of investors’ strategies. For an investor to efficiently achieve long-term value creation, a clear and concise articulation of the specific investment strategies should come first before appropriately addressing the benchmarking process.

Evaluations and incentives

Ensure alignment between asset owner’s and asset manager’s financial interest towards the long term. Institutional investors should evaluate internal and external asset managers with an emphasis on process, behaviours and consistency with long-term expectations. Formulate incentive compensation with a greater weight on long-term performance.

Investment mandates

Define and formalise the portfolio approach, and the relationship between the asset owner and asset manager. Institutional investors should use investment-strategy mandates not simply as a legal contract but as a mutual mechanism to align the asset managers’ behaviours with the objectives of the asset owner.

1. Asset managers with a short-term focus are increasingly setting prices in public markets. They take a narrow view of a stock’s value that is unlikely to lead to efficient pricing and collectively leads to herd behaviour, excess volatility, and bubbles. This, in turn, results in corporate boards and management making suboptimal decisions for creating long-term value. Asset owners can create greater and more sustained value by adopting strategies that harvest the fruits of long-term earnings growth and benefit savers, beneficiaries, capital markets, and economies.
2. Long term investing is about making investment decisions with a sustainable future-oriented perspective.
3. Focusing on the long term strategies can help align stakeholders and minimise agency costs.
4. The focus of long-term investors should be on intrinsic value of assets and long-term value creation rather than focusing on the short-term volatility of market prices.
5. Long term focus can allow and encourage portfolio management to remain focused, patient and disciplined.
6. Long-term investing can also enable investors to positively influence the management of investee companies.
7. Long-term investors should use investment-strategy mandates not simply as a legal contract but as a mutual mechanism to align the asset managers’ behaviors with the investor's objectives.
8. To guide how a portfolio seeks to achieve long-term value creation, clear and comprehensive articulation of the investment strategy should always come first. Only then should appropriate benchmarking be specified to measure future success.
9. In determining the intrinsic value of investment, give appropriate weight to inherently long-term factors, including the long-term implications of environmental, social, and governance (ESG) risks and opportunities.
10. While long-term investing can provide an advantage, particularly in navigating short-term volatility, asset owners such as pension funds should also have a long-term perspective as they have to generate long-term returns for their individual savers.