5 Questions for CPPIB’s Poul Winslow
Can long-term investors reshape the markets they invest in for the better?
June 28, 2017
From thematic investing to the creation of a new Long-term Value Creation Global Index with Standard & Poor’s, the Canada Pension Plan Investment Board (CPPIB) has been using its considerable $264.6 billion heft to help foster long-termism in global capital markets.
In the latest of our 5 Questions series, we talked to Poul Winslow, managing director, head of thematic investing and external portfolio management at CPPIB about the new index, the challenges of manager selection, and the top risks big investors face in the market today.
As a thematic investor, what are the top global thematic opportunities you see right now?
Let’s start with defining what thematic investing is for us – which is an approach that prioritizes long-term structural growth changes over short term cyclical growth drivers. At any point in time we have 10 to 15 themes but they’re all driven by two structural growth drivers: evolving demographics and disruptive innovations.
On the demographics side, we all know certain countries including Canada are ageing – and we have a growing group of Millennials. Through thematic investing we can look at the changing consumer behaviours of those demographics and how they are shifting the economy. We then look at what this means for our themes — are they changing? In this case, those themes are slowly moving along with the evolving demographics. We call this a lifecycle consumption focus – and in five years it will be a different focus driven by the same overall theme of demographics.
Our other focus is less predictable: disruptive innovation has impacts both on investment opportunities and on our existing investments. On the technology side, there has been an increase in innovation – it’s happening faster and faster. An example is the introduction of autonomous vehicles and how that could impact the opportunity set. It’s too early to say what consequences of self-driving vehicles will be, but it will no doubt change the way we look at transportation altogether.
What are the key challenges you think long-term investors face today when it comes to hiring external managers? What criteria should they look for?
If you consider yourself a long-term investor, then the main feature of a manager should be that they are aligned with you – that you have similar expectations for the mandate and the role they are playing for you. When it comes to alignment, we often talk about fees but there are other terms that are relevant. It’s more about being aligned in the sense that you’re paying for long-term skills — not short-term luck. On the performance side, you also need to be very clear in advance with a manager about how much volatility is acceptable.
The common model in this industry is to look at the three Ps – people, process, performance. But it’s really the team you are buying into and their process. If you’re using performance to assess a manager, then it should only be to understand their actions and how they are expected to react in every market.
You recently introduced a new index at Davos – can you define what it is and how it will help investors? What underlying characteristics could it perform differently or better than other indices? Is it riskier?
We created this index with Standard & Poor’s – it’s called the S&P Long-Term Value Creation Global Index and it tracks the top companies in the world considered best of class in their long-term focus. It’s part of the Focusing Capital on the Long-Term initiative which was founded by CPPIB, McKinsey and other leading investors in reaction to the short-termism we had seen in the markets. When investors are all acting in the short-term, value is destroyed. For example, when companies feel short-term pressure to perform they might not make the investments that create long-term value. This index was created in reaction to that – to discourage short-term decision-making among corporate senior management and boards. In exchange, what we do as investors is to make a commitment not to put short-term pressures on them.
As a large global institutional investor, we can engage with companies around the world and encourage long-term thinking. It’s a big task – but what do investors do if they don’t have the resources to do it? How can they support the case against short-termism? This index will help because it describes the companies we are looking for. All investors could create a passive investment and show their support without having to engage directly with those companies– it’s a focus list of companies to look at.
Finally, the more capital investors put into an index like this, the more attractive it will be for a company to become a member. That’s how capital markets work. We are starting a positive cycle where investors and corporates are aligned – if capital is flowing to companies focused on the long-term through this index then we are stopping value destruction in financial markets. And we are all better off.
How do you determine what companies should be in the index?
The index has two components. One is backward looking – we look for companies you could call quality companies as defined by historically consistent high return on equity and limited use of leverage and accruals. Basically, good quality companies that indicate that these they would be looking at the same high quality measures in the future. The other measure we use is more forward looking – we use surveys on corporate policies around long-term investments and strategy to measure long-term thinking. So, the index is based on data that are both quantitative and qualitative.
What is the top risk in the market you see right now that you are keeping an eye on?
I think there is a lot of capital here that is chasing similar types of assets around the world. It’s a common theme we all see – and it’s obviously a concern in terms of valuation in various asset classes, including the more illiquid ones like private equity and real assets. But the most important thing for investors is their investment process. They need to be disciplined and driven by long-term factors instead of being tempted to change assumptions based on short-term trends. You need to stay on track.