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Fulfilling the purpose of investment, not the purpose of the investment chain

by Daniel Godfrey, Co-Founder, The People's Trust The purpose of investment is sustainable wealth creation. Success delivers long-term absolute returns for the providers of capital. But it also creates more innovation, better jobs and better supply chains. It protects the environment and generates productivity growth and tax revenues that underpin education, infrastructure and the welfare state. The only way to create a society that works for the many, not just the few is to make the cake bigger and share it more fairly. And the only way that will ever be achieved is through long-term investment and hard work. Set against these vital goals the investment industry is highly dysfunctional. Capital passes from individuals through an array of advisers and consultants, life companies and pension funds, investment managers and investment bankers. Eventually, it is deployed by Boards and Chief Executives, hugely incentivised and massively pressurised to hit short-term targets and prioritise the short-term balance sheet over long-term cumulative returns derived from the sustainable success of the business. The investment chain, from the moment it leaves the pockets, pay packets and bank accounts of individuals, is travelling through a sausage machine where the primary driver of success is measured short-term relative return.  Inevitably, focus on short-term relative performance which damages sustainable wealth creation. Ultimately, the aggregate impact of the capital market chain is leading companies to chop down the trees in their orchard because the value of the wood is greater than the value of this year’s apple harvest. The consequences, for investors and society are severe. In their February 2017 report, “Measuring the economic impact of short-termism” McKinsey & Co. found that:

  1. 87% of executives and directors feel most pressured to demonstrate strong financial performance within 2 years or less

  2. 65% of executives and directors say short-term pressure has increased over the past 5 years, and

  3. 55% of executives and directors at companies without a strong long-term culture say their company would delay a new project to hit quarterly targets even if it sacrificed some value Many commentators point the finger of blame at asset owners. But capital is transmitted through the markets via a chain of intermediaries and agents where no individual link has agency to change the chain on their own and where the chain is too strong to be reformed from the inside. In a sense, it’s everybody’s fault, so it’s also no-ones fault. To transform investment, we need new investment funds that can operate outside the chain to be catalysts for change. That’ll be easiest to achieve with funds whose managers have no external shareholders pressurising them to grow a P&L every year. We need to educate investors to set time horizons well beyond three years and to stick with it when the going gets tough so that we get investment managers who are not under pressure to beat an index or a peer group over short time periods to avoid career risk. And we need those investment managers to support, or, if necessary, require companies to optimise long-term, sustainable wealth creation. The investment chain is collectively responsible for supporting companies to change and permitting them to focus on becoming Tomorrow’s Companies as envisioned by all who support the organisation. The aim of The People’s Trust (TPT), which launched on 8th September, is to preserve the integrity of the purpose of investment to deliver sustainable wealth creation. It does this by creating a new chain, one that can resist pressure to behave in a short-term manner from wherever it may come. There are four key elements. The structure. The People’s Trust has no commercial backers.  It raised its set-up costs through crowdsourcing from the public. It will be a listed investment company, so its owners and customers are one and the same, giving the it the character of a mutual enterprise. And, to avoid the agency risk of executives seeking to line their pockets, The People’s Trust will have no bonus scheme for executives. Instead, it will pay a significant proportion of salary in seven-year deferred shares. In addition, The People’s Trust aims to enhance executive and Board accountability through establishing a Shareholders’ Committee. The shareholders. The People’s Trust seeks investors who both understand and are committed to its proposition of delivering absolute returns, with no index benchmark over rolling seven-year periods. If investors dial-up their time horizons and commit to sticking the course in turbulent times, we hope to deliver better returns with less risk than most funds and markets. The portfolio managers. They will take an investment approach that is centred around long-term, high conviction, investment in companies that they believe will compound wealth creation sustainably and so have a better impact on society as well as better reruns for shareholders Furthermore, The People’s Trust will protect outsourced investment managers from short-term pressures by giving them seven-year contracts. This will enables them to invest without the conventional pressure that forces them to look over their shoulders constantly at an index or a peer group because they know face career risk if they’re too far behind after no more than three years. The stewardship. The People’s Trust’s investment managers will focus on sustainability through responsibility. It’ll encourage investee companies to sacrifice short-term returns if necessary in order to invest for the long-term. It will also work, where it can, with other similarly-minded investors to help comapnies stand up to pressure from short term investors. There is no more important task than the reform of the investment chain. There is no more direct way of making the world a better place than repurposing $100 trillion of investment capital globally towards sustainable wealth creation.

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