Institutional Investors and Long Term Investment

Juan YermoFinancial Affairs DivisionDirectorate for Financial and Enterprise Affairs

Outline

I. What do we mean by long-term investing and why does it matter?

II. What are the barriers to and trends in long-term investing?

III.What are the potential policy solutions to promote long-term investing?

IV. What is the OECD doing?

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I. Long Term Investment Strategies

• “Patient” capital:– Long-term / illiquidity premia, lower turnover, less

procyclical investment strategies higher net returns, greater financial stability

• “Engaged” capital:– Active voting policies better corporate governance

• “Productive” capital:– Support for infrastructure development, green

growth initiatives, SME finance, etc sustainable growth

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What does long-term investment mean and why does it matter?

Long-term Investors

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Long-term Investments

5Source: World Economic Forum (2011)

II. Trends & barriers in LT Investing:

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Shorter investment holding periods

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Source: OECD (2010)

Holding periods in major stock markets

Growing myopia over future income

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Source: Haldane and Davies (2011)

Short-termism indicator: shareholders discount future cashflows by an additional 6% - “x” parameter in Haldane and Davies (2011)

Trends in pension fund allocation

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• Declining equity allocations in some countries (e.g. UK, Netherlands)

• Less than 1% of their assets in “unlisted” infrastructure, over 2% in hedge funds

• Private equity mainly LBO-driven, little venture capital

• Growing appeal of ETFs and other liquid investment vehicles

III. Policies to Support LT Investment

• Build expertise – appoint more knowledgeable pension fund trustees

• Forster collaborative strategies – pooling to allow for scale investments (share risk and knowledge)/ collaborate to share corporate governance oversight costs

• Check prudential regulation – avoid unintended misalignments pushing institutional investors into a short-term focus

• Supervisory oversight – investigate firms with high turnover etc.

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Reform Regulatory Framework for Institutional Investors

Policies to Support Long Term Investment

• Regulatory support – check no barriers (take over issues etc.)/ practical help (electronic voting) or compulsion (disclose voting policies) / multiple voting rights?

• Collaboration and professional services – e.g. ICGN/ PRI initiatives / proxy voting services

• Guidance on behaviour expected – Stewardship codes

• Supervisory guidance and accountability / disclosure over LTI

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Encourage Institutional Investors to be active shareholders

Policies to Support Long Term Investment

• Supportive tax policy and policies to promote long-term investment – tax policy on debt vs. equity /FDI policies

• Government issuance of long-term instruments – long-term inflation linked bonds/ longevity bonds?

• Transparent environment for infrastructure – long-term policy (including on environment)/ data collection/ suitable investment vehicles (PPP)/ risk mitigation mechanisms

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Government support for long-term investments

Policies to Support Long Term Investment

• Appropriate financial consumer projection framework – transparency/ redress mechanisms

• Tailored financial education and awareness strategies and programmes – explain benefits of long-term investing

• Default mechanisms – life-cycle strategies

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Financial education and consumer protection regulation

IV. What is the OECD doing?

• The purpose of this project is to investigate ways to encourage and assist institutional investors (particularly pension funds and insurance companies) to act over longer-term periods.

• Drawing on expertise across OECD (Directorate Financial Affairs / Corporate Governance/ Tax/ Environment etc.)

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Long-term Investment Project

OECD Long-Term Investment project

– Monitoring LT Institutional Investors: GPS, GIS data collection

– Research papers • Pension Funds and Investment in Infrastructure;• Pension Funds and Green Growth;• Life Insurance & Infrastructure Investment;• The Emerging Market perspective on Institutional

Investment in Infrastructure;• Impact of Solvency Regulation and Accounting

Standards on Life Insurers’ and Pension Funds’ Investment Strategies;

• Institutional Investors and Corporate Governance.

– Dissemination through a series of high-level meetings and conferences – bringing government representatives, regulatory community, investors together

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Further OECD information

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www.oecd.org/daf/pensions - private pensions webpage

www.oecd.org/daf/fin/wp - OECD Working Paper series on Finance, Insurance and Private Pensions

www.oecd.org/finance/lti - OECD long-term investment project webpage