Page 16 – Top1000funds.com

The Canadian pension fund market has grown to around $4 trillion in value and is dominated by eight major players – the so-called Maple 8. But that hasn’t stopped a high degree of innovative and flexible business models, all built on the considerable groundwork undertaken by those who went before them.

The Top1000funds.com Fiduciary Investors Symposium in Toronto heard that the endgame for any fund in terms of its structure and processes and its path to get there depends on the starting point.

Barbara Zvan joined the University Pension Plan (UPP) as chief executive in 2020 when “literally, at this point, they had a plan text, and they didn’t really have regulatory approval yet, and there was, I kid you not, not a stapler to be found”.

“There was nothing,” she said.

“I had 24 great years at Ontario Teachers, apparently working with a bunch of legends and lots of great colleagues. I was very comfortable with what $100 billion or $200 billion looks like. UPP is $12 billion – I’m missing a zero. It’s a lot harder to manage $12 billion than $120 billion because everything costs 10 times more when you look at it as an MER. So I called 18 friends.

“I started saying, so what do you do? And what do you have? What have you been able to do? I also called CEM [Benchmarking]… and used some of the product data. And you saw a real differentiation: after $10 billion they started doing some privates and things.”

Zvan said early decisions included what aspects of investment management should be internalised, what should be external, and how should external managers be assessed.

“At the top of the house in terms of research, knowing that I will have a complex portfolio of liabilities and also from the study of talking to 18 peers, not a lot of that group did asset liability work or risk analysis,” she said.

“We made an explicit investment to do that internally, ourselves.”

Zvan said that while she was at Ontario Teachers, she oversaw the establishment of three different risk systems, and given the volume of data the fund held, the last one took six years.

At UPP she is “putting in Aladdin in a year”, she said.

“There are so many more tools that you can leverage today.”

Logical and progressive

Zvan said it was critical to build systems and processes in a logical and progressive way and not try to do everything at once.

“Have you ever watched a crab walk across a beach? Look at the legs, they don’t all move at the same pace, but it gets to a direction,” she said.

“So really when building UPP, that is the balance between what do I need to build now, which controls first, what depends on what we’re doing, and we’re taking that approach.”

Zvan said there were five principal enablers in building UPP into an effective pension organisation from a standing start. She said the first was staffing, and “making sure that talent is incentivised, it’s innovative and it can come with ingenious solutions, and there’s a good culture”.

The second was appropriate systems and controls, so that if a university wanted to conduct due diligence on UPP before committing staff pensions to it, “we wanted excellent marks”.

“They’re giving us their money, the members are giving us the responsibility for their pensions, we want to make sure we have the right controls,” Zvan said.

Zvan said UPP spent considerable time on the third enabler, namely developing the right structure, including governance. At the outset “not only there was no organisation, I can tell you there was not even a delegation to management, there was not one committee mandate, there was no board operating guidelines”.

“We had to build all that framework of how this board would work,” she said.

Compensation was also critical as the fourth enabler, and Zvan said UPP wanted to ensure “we had the right incentives in place”. She said the organisation hired around 200 people and “for the vast majority of them, we had no incentive program yet”.

“I gave [them] a letter, some people can attest, [saying] there is a salary, this is your first bonus, trust me,” she said.

“That was that was the extent of it.”

And finally, UPP was able to leverage technology as an enabler. Zvan said technology had advanced in leaps and bounds since the early 90s.

“One reason why we could get up so much quicker is, one, we had the playbook; but two, we leveraged technology completely,” she said.

“We were in the middle of COVID, we did cloud software as a serious service. We don’t code one line of code today, we just move data around and we leverage and try to be good buyers in that area.”

The $113 billion Investment Management Corporation of Ontario was formed in 2016 and chief executive Bert Clark told the symposium that “I don’t think anyone can understate the work that that Claude [Lamoureux] and the early legends, pioneers, of the Canadian model did to establish the importance of good governance”, the benefits of which funds today continue to reap.

“I still think that’s the bedrock of what we do,” Clark said.

“It gives us operational freedom; ideally, lack of political interference – well, there’s always that perpetual risk [and] we’ve seen it recently.”

New avenues open

Clark said developments in the industry mean the newer funds have some new avenues open to them that weren’t as readily available to older funds established many decades ago.

One such theme is cost efficiency, Clark said.

For some older funds, cost efficiency was captured by internalising investment management and building out large teams.

“But when [they] were internalising, Brookfield was $20 billion; today, Brookfield is a $1 trillion,” Clark says.

“There’s nothing alternative today about private assets, they’re half our portfolio and probably half of others’.

“For us, there’s just a very different calculus today about how we get at cost efficiency. We actually made a very deliberate decision not to build big internal teams, but to still target cost efficiency through partnerships.”

Clark noted that “it makes no sense for us to try and compete with [asset managers like] Apollo or Antares or Aries”.

“What we need to be doing is figuring out how to partner with them on the most efficient terms because they have origination and value add capabilities that we just cannot replicate,” he said.

“That’s awesome. We have we have a different size, frankly, than a CPP, or a [Ontario] Teachers, even today. I think the spirit of cost efficiency is something that that is still very much alive and well.”

Clark echoed Zvan’s comments about advances in technology and the options and flexibility it presents to funds today.

“When I arrived at IMCO, I had no email system,” Clark said.

“I used to get [told] ‘we promise we’ll pay you’ and they paid me in checks. Literally, I remember I got a check and had to go to the [bank]. I hadn’t done that in a long time.

“And in five years we put in an email system, in less than five years actually, an HRIS system a risk system, a total portfolio system, a custodian. In fact, we’re on our second risk system, and so to me there are there are massive advantages we have in starting today and massive cost advantages that we can access through actually outsourcing, as opposed to internalisation.”

Clark says cost efficiency arises “by having operational latitude to make the right decisions between internal, external, paying people the right level or paying external managers”.

Investment and operational innovation

Clark says that from the outset, Canadian funds have demonstrated high levels of investment and operational innovation

“They were…doing swaps, they were investing in private assets. They were some of the early bidders on infrastructure when only a couple of bidders showed up to buy things like [Highway] 407, where you’d now have a lineup to buy it, or AltaLink.

“There’s probably nothing that’s ever totally new. But I think that spirit of innovation is still something you find in all the Canadian funds.”

Clark says any organisation also needs to understand and operate within its own limitations.

“[Thinking] you’re going to outsmart everyone, as you know, is not a good strategy,” he said.

“We’re very disciplined about saying we don’t have to do everything, and let’s make sure that if we’re trying to do something, if we’re trying to generate that very elusive net value add we have some credible basis for doing that. So [the big things are] the right asset mix, adequate liquidity, avoiding the big bet and only compete where you have an advantage.”

Even though the Healthcare of Ontario Pension Plan (HOOPP) was established in 1960, chief investment officer Michael Wissell said things are being looked at today “perhaps a little bit differently than [they] might have been looked at…in the early 2000s”, including, for example, managing liquidity.

“The entire industry has been tenaciously focused on liquidity all the way along, as an industry we’re realising [that] there was a mentality years ago that ‘cash is trash’, it was out of the endowment model which was [to] be fully invested [at] long-term maximum risk all the time, and over time that would harvest the greatest returns,” Wissell said.

Wissell says that in recent years “you’ve seen a little bit more of an adaptive world, where maintaining some firepower, so to speak, or cash or leverage availability or what have you [and] basically being liquid and being able to take up tomorrow’s opportunity set, actually sowing those seeds in those environments are where you really can meet your returns.”

‘Fewer people than years ago’

A continued focus on operational efficiency and containing costs and enabled by relatively recent advances in technology and processes, and evolving relationships with external asset managers, means that today “you probably can manifest a team that runs with fewer people than maybe we thought years ago”.

“And actually, that has more than just the benefits of keeping the economics controllable,” Wissell said.

“You have to remember every profligate dollar you spend doesn’t compound for the next 50 or 75 years. A profligate dollar spent today doesn’t compound and, as Einstein said, the most powerful force in the universe is compounding.

“But in addition to that, you can create other exogenous problems…if you let your teams grow beyond the ability for them to engage in meaningful work.

“This industry is in evolution. We all benefit by the learnings of the of the funds that came before us [and by thinking about] liquidity and cost containment and how big do you want these teams to be. Are you trying to compete with GPs, or are you trying to leverage GPs? These are elements of the industry that are truly being rethought and reimagined as we go forward.”

Alberta Investment Management Corporation (AIMCo), established in 2008, manages pension funds on behalf of a range of individual clients “and that makes us a little more complicated in certain ways”, its chief investment officer Marlene Puffer, who took up her current role only last year, told the Symposium.

“We don’t have one pool of capital that we can easily manipulate,” Puffer said.

“We can’t easily layer on derivatives and allocate back out to the clients. We can, but it’s not easy.

“As a result, we have pools and we have to deal with some pools we are able to have as open pools for our clients; some have to be closed pools and reissued in different vintages. It’s a pretty complex platform.”

Puffer said she personally had not worked at Ontario Teachers before joining AIMCo, but many individuals there had, including her immediate predecessors, and they “set up AIMCo’s systems and approaches in the image of Teachers, and there’s lots of great things about that”.

“But some things that are make things challenging, because there’s it started out as a focus on total fund,” she said.

“We actually have 17 clients and 32 pools of capital and we actually need to pay close attention to each one of those and make sure we’re delivering what each client actually needs.

“We’re really rebuilding, in some ways, some of that approach and how we tackle our asset management and the systems related to it.”

That means the operational demands of the organisation are quite distinctive, Puffer said.

“We need a team on client relationship management, we need a team that is paying attention, not just at the total portfolio or total fund level, but we need to actually pay attention to each of these clients individually.”

Strategy is everything

Puffer said that “strategy has to drive everything” as the organisation grows and develops.

“The strategy and how we’re internally versus externally managed, all of those things that [other panellists] have articulated so well, are so key,” she said.

“And yet, the starting point matters.”

Puffer said AIMCo started with a significant internally managed direct investment portfolio, which was global and diversified.

“It already is there; I can’t shut that down [and] I don’t want to shut that down,” she said.

But at the same time, the organisation is rethinking and becoming more strategic about the relationships it has with external managers to harness growth and scale, and “getting smarter” about creating “a real strategic partnership model, not just for infrastructure, but for every one of our asset classes, and importantly, across our asset classes.

Puffer said large asset managers “have an incredible global platform, and we want to be a part of that.”

“But we also don’t want to be beholden to them entirely,” she said.

“A model of co-investment alongside direct investing is at the heart of it. And then you back out of that, what does the staffing have to look like?”

Puffer said AIMCo is establishing global offices and expanding from its home base of Edmonton into Calgary, Toronto, New York, London and Singapore, and “part of the reason for that is to be able to hire people with the right expertise and the right level of experience”.

“It’s all driven by strategy,” Puffer said.

“And a big pillar of our strategy today is expanding our diversification globally.

“So it all interconnects. You can’t talk staffing without talking about your business model and strategy.”

Much can be said about Canada’s so-called Maple 8 funds and their pension models which have provided stellar learning materials, with pupils like California Public Employees’ Retirement System (CalPERS) and others around the world.

The collective consists of eight public pension funds with a number of shared characteristics: extensive in-house investment capabilities; freedom from political interference; significant ownership in illiquid and alternative assets; and the ability to offer competitive market compensation for talents, just to name a few.

However, at the Top1000funds.com Fiduciary Investors Symposium, president and chief executive of the C$128 billion ($93.5 billion) Ontario Municipal Employees Retirement System (OMERS), Blake Hutcheson, said the Maple 8 are actually all “dramatically different”.

“Newspapers write about us as though we’re one – we couldn’t be more different, couldn’t come from more different places, and couldn’t have more different structures,” he told the symposium in Toronto.

“So [for] CPP… the state looks after the liabilities, they are an investment arm governed by the Feds with a really long view. PSP is also governed by the Feds, no stakeholders or members per se. They can take a very different view of their balance sheet than we do.

“OMERS, for example, we have 620,000 members, every decision we take is in respect to our own liability, and our liability stream.

“All our asset allocations are to dovetail with how we get or keep 100 per cent funded, and how we make sure that our cash flow matches because today, our outflows are bigger than inflows.”

OMERS currently has fewer than two active members for every retiree and according to the fund’s own estimate, it will have fewer than one active member for every retiree by late 2030s. If member life expectancy increases faster than the fund has assumed in its valuations, its pension liabilities will also increase.

Liquidity matters

“Every place we start is what’s our liability? What do we need to do to pay pensions? How do we stay 100 per cent funded? And how do we construct a portfolio based on our known needs – independent of any other philosophical way to invest?” Hutcheson said.

OMERS’ allocation today consists of 20 per cent equities, 30 per cent fixed instruments (bonds, private and public credit) and, with some leverage, it holds 50 to 60 per cent in private assets (real estate, infrastructure, and private equity).

Speaking of the shift into a higher interest rate environment and what the future holds for investors, he said one “can’t be really wrong and still be right for long”.

“A lot of people were really wrong and still right for a while, and there was a massive transfer of wealth from those who were typically savers to those who were borrowers. Anybody [who] was borrowing was gaining rank against the rest of us, because money was free.

“Now, the day of reckoning is coming for those who are over levered – that didn’t work so well. And for those who have capital, there’s a massive opportunity.”

When the cost of money increases, Hutcheson said it’s more important than ever for investors to “move quickly”. OMERS’ pivot to credit in the shifting economic environment is one such example, he said, and its fixed instrument portfolio is now getting a consistent 10 per cent return.

“We can lend money into assets we know and we understand and get 500 to 700 basis points more than we would have a couple of years ago,” he said.

“Rather than taking the cost of money and making it a negative, you can transform your portfolio to take advantage and make it a positive.”

A founding principle of the Canadian pension system is under attack. The Fiduciary Investors Symposium in Toronto heard from four individuals who have been instrumental in making the system what it is today, and that the sound principles that made the system great need to be defended.

Two high profile pioneers of the $4.1 trillion Canadian pension industry have warned the founding principles that have made Canadian funds exemplars around the world are under attack.

Independent board member and former Canadian Pension Plan Investment Board chief executive officer Mark Wiseman told the Top1000funds.com Fiduciary Investors Symposium in Toronto that principles set out in the early days of the development of the system are “being assailed”.

And University of Toronto Rotman School of Management executive in residence and pension system luminary Keith Ambachtsheer told the symposium that these attacks undermine the legitimacy of a system and the funds within it that are designed to provide pensions to millions of people.

“The Canadian model is under threat today,” Wiseman said. “When you see trillions of dollars in assets, when you see a government that is running deficits, when you see economic malaise – and we’ve seen this in other jurisdictions –this is the time when pension assets get raided. And I’ll use that term, because that is the risk that I think the Canadian model faces today.”

Wiseman warned that the issue is “much more acute than people think”.

“It will come under a different guise, it’ll be said, ‘you should invest more in Canada’, ‘you should invest more in infrastructure’, ‘we should let people have access to their capital earlier’, or whatever excuse may be the fact of the day.

“And I truly believe that if Canadians, whose money it is, it’s not the government’s money, whether you’re in the Ontario Teachers plan, or you’re in the CPP, or you’re in any other pension system, it’s your savings as a beneficiary.

“If the government went into your bank account and took that money, you’d be up in arms. And Canadians have to understand that [if] the government tries to direct their capital away from being invested for the purpose of maximising risk-adjusted returns, the whole system is at risk. And I think we’re really at risk today.”

Ambachtsheer said raiding the retirement savings of workers undermines the legitimacy of the entire system, and “really what you’re talking about is that the legitimacy of this model is under attack”.

“A recent example would be this move to move more of the assets into Canadian investments that we just saw in the last few months,” he said. “To me, that’s sort of an attack on legitimacy. The counter to that is…I have a sister [and] brother-in-law who are teachers. They are up in arms about this movement to touch their money. The counterpoint to the threat is that as long as people believe that that money is being managed in a legitimate way, then I think that’s the best hope we have.”

Wiseman and Ambachtsheer were on a panel alongside inaugural Ontario Teachers’ Pension Plan CEO Claude and CPP Investments current CEO John Graham, speaking about the origins and much-revered tenets of the Canadian system that are admired by pension funds around the world. It was the first time that all four “legends” have been on the same stage and it set the scene for the conference program to come.

Historical perspective

Legitimacy is one of the foundational elements of the Canadian system and was first canvassed in a seminal 1976 book, The Unseen Revolution: How pension fund socialism came to America by the management consultant and author Peter Drucker. Ambachtsheer said the publication of the book really marked the birth of the modern Canadian pension industry.

“It’s got a specific start date and has evolved over time from there, involving a number of events and a number of people, with some of these people becoming increasingly famous with the passage of time,” Ambachtsheer said.

Drucker’s book set out the issues likely to arise as the then-very young Baby Boomer generation began accumulating enormous wealth. One of the book’s core contentions was that Karl Marx was wrong: workers would not seize the means of production through violent revolution, but instead through their pension funds.

“Given that insight, he quite correctly posed the next question, which was, okay, what does that imply for how we should think about organising a retirement income management system,” Ambachtsheer said.

Ambachtsheer summarised the key messages in Drucker’s book as: the new institutions we must create to administer and invest pension monies must have adequate management; be rendered legitimate; they must be autonomous institutions; be accountable to their constituencies; and free from any conflicts of interest.

“The only footnote I would make there is that the Drucker definition of ‘adequate’ in terms of ‘adequate management’ is a little different than just ‘good enough’,” Ambachtsheer said. “Drucker’s standard of ‘adequate’ was very high. And that was actually one of the key messages I took away from the book, which was this notion that pension organisations deserve as good management quality as any other organisation.”

Another big step occurred in around 1987 when then-Treasurer of Ontario Robert Nixon “decided that public sector pension fund management in Ontario was not being done very well and that there had to be a better way”.

Ambachtsheer was involved in the production of a 400-page report into what that better way was.

“When you condense the messages in that report down to, again, one paragraph, guess what? You end up with the original Drucker message,” Ambachtsheer said. “Nixon [and] the president of the Ontario Teachers Federation Margaret Wilson also took the report seriously. The two of them got together and said, we should make this happen, and that led to the passage of the Pension Management Act 1990. It basically created the legal framework for this new organisation.

“And what happens next [is] you’ve got a board, you’ve got a plan, you’ve got a legal structure; now you need a CEO. And that’s the next part of the story because that CEO is sitting right over here.”

More than investments

Ontario Teachers’ Pension Plan inaugural chief executive Claude Lamoureux told the symposium that it’s fair to say that in the mid-70s, and despite Drucker’s astute prescription for an optimal pension plan system, the administration and governance of at least some pension plans was far from ‘adequate’ in any sense of the word.

Lamoureux says that OTPP, for example, had accounts that hadn’t been reconciled for a decade, and its telephone systems didn’t work.

“When you did a survey of the employees, you could see that people didn’t know where they were going,” he says.

“They knew that the quality was lousy. They didn’t want any of their relatives to be involved with the teachers’ pension plan. And there were a lot of mistakes being made.

“Eventually, we had to recalculate everybody’s pension.

“Why? Because when amendments were made to the pension plan, there was no communication between the people making the law and the manager. And so you do that for a number of years, and where do you end up? A half billion dollar kind of error. We overpaid to the tune of $360 million. And we also underpaid to the tune of $140 million.”

Lamoureux says that what has grown out of the Canadian experience is the clear understanding that an effective pension organisation must be “more than just an investment operation”.

“It’s [also] it’s having the right controls, having the right IT team, having the right people having the right auditor,” he said.

“And when you do that, eventually, you can demonstrate that you can manage money and you can do as well as anybody.

“When I look at Ontario Teachers, it’s more than just you need the right structure. You need a board that really understands what’s going on. And you know, I always try to emphasise with the teachers and the government, that we need quality on the board, we need to keep them.”

Origin story

Lamoureux said it is critical that pension funds hire the best people they can, pay them well enough to retain them, and empower them to be creative and entrepreneurial.

Wiseman told the symposium that “it really was Ontario Teachers, and Claude in particular, that developed the Canadian model”, and that Wiseman himself was hired by OTPP in 2001 to “be part of a team that was going to go the next step in terms of disintermediating…the private equity asset managers by doing more co-investments, becoming more of a direct investor, and by innovating”.

“Ontario Teachers had the right governance in place and Claude’s absolutely right, and the quote that was shared earlier by Keith is absolutely right, that the governance and management really mattered,” Wiseman said.

“We had a professional board that Claude had put together. We had a CIO that understood multiple asset classes. And we were an incredibly entrepreneurial organisation.”

Wiseman said the team at OTPP was able to demonstrate that “with the right governance, with the right controls in place, and checks and balances, that indeed, a pension fund could also be an asset manager of the first degree”.

“And, if you had those preconditions in place, you could be an asset manager that not only could capture the substantial fees that were otherwise outsourced, but you could actually outperform because of the comparative advantages you had, whether it be your scale, the long-term nature of your capital, and your ability to innovate.”

While this was all going on at Ontario Teachers, almost literally down the street another pension management organisation was developing quickly, the Canada Pension Plan Investment Board (CPPIB). It was looking to OTPP for clues and cues on how to create just as excellent an organisational structure and performance for its beneficiaries.

CPPIB was formed in 1999 and “really from 1999 until 2005 was a very conservative, traditional organisation because you have to start somewhere”, Wiseman said.

“After the first five years of CPPIB they looked north up Yonge Street to Finch [Avenue] and came to the conclusion that they wanted to replicate the Ontario Teachers model.”

CPPIB hired Wiseman “and others, at some level to replicate and maybe a little bit, to try and improve on and innovate on the model that had been developed at Ontario teachers”, he said.

“And so CPPIB over the next several years…we kind of, I think, in my view helped take that teachers model to the to the next level as we continued to grow and innovate,” Wiseman said.

Staying ‘modernisable’

CPP Investments current president and chief executive John Graham told the symposium that when he was first approached by a headhunter in 2007 and offered a job at the pension management organisation he quickly realised there was “something there”.

“There’s this organisation that has an unbelievable governance model,” he said.

“It has resources, and it has the ambition to be great…not on a Canadian scale, but it has the ambition to be great on a global scale. I think I got to take this opportunity.

“When I started, we would define the organisation as very much in a capability building mode. We were building out our capabilities across asset classes, and across geographies. And as I say, Mark was really instrumental in pushing the organisation into new geographies, pushing the organisation into new asset classes.”

Graham says the build-out period lasted about a decade, but it quickly proved its worth in driving investment returns.

“The next phase of evolution is we’ve built out these capabilities, and it’s really bringing it all together to ensure that we’re driving investment excellence for the organisation itself, ensuring that we’re allocating capital to the best opportunities globally to the best asset classes globally.

“And, ultimately ensuring that we’re we are delivering on the mandate of the of the organisation. And it’s not easy to go from capability building to now really focusing in on the entire system, really focusing on the entire organisation, the entire fund, and making sure that people, process, the technology is all in place to ensure that we can deliver returns for generations to come.”

From an idea in a book published in 1976 to a $4 trillion-plus industry today, the Canadian pension fund system is now entering a new phase. CPPIB itself is creating a structure for when it becomes a C$1 trillion fund (and it’s forecast to grow to C$3.6 trillion by 2050). And it will be the same principles set out by Peter Drucker, built on by Lamoureux, Ambachtsheer, Wiseman and many others that will continue to guide it.

“We will never be a modern organisation,” Graham says.

“We just need to make sure we’re a modernisable organisation, we just need to make sure we’re an organisation that, again, has the right people, the right culture, the right technology, the right process, the right governance, that will continuously change as the market changes around us, as the capital markets change around us, as the private markets change around us, that we just will evolve with it.

“And we don’t essentially solidify as an organisation, we ensure that we continue to be modernisable as an organisation, and that’s probably as much as the mindset and the culture is anything else.”

If managers want to reinforce their long-term investor bona fides they should adopt appropriate time horizons for the investments they make, disclose more about how long they hold assets, and reconsider paying themselves based on short-term results. Only then will the interests of asset owners and the managers they employ be truly aligned.

In a world where short-termism is becoming increasingly prevalent, uncovering the truth around market value and company governance is increasingly difficult.

At the Top1000funds.com Fiduciary Investors Symposium in Toronto, MFS Investment Management president Carol Geremia said players in the investment value chain need to adopt different performance metrics and mindset if the industry wants to realign towards long-term value creation.

MFS is known for establishing the world’s first mutual fund a century ago and today has $606 billion assets under management.

Geremia told the symposium that managers today must take five times the level of risk to get the same amount of return as 30 years ago.

“We all know that rates are slowly changing now, but with them being so low for so long, we’ve all had to just dial up risk endlessly,” she said.

“Then what we did is build a measurement system as we took more and more risk to hold ourselves accountable. And we didn’t get longer with the risks we were taking, we actually got shorter.

“I’ve been in the business 40 years, and I’ve always learned that’s not how you take on risk – you extend your time horizons, you don’t shorten them. Yet, we’ve built this measurement system, because it’s so hard to figure out the markers to the longer-term destination.”

Geremia said it is time the industry considering adopting more comprehensive metrics such as the holding horizon, to encourage long-term thinking.

“You could go to every single active manager in the world and ask them ‘what is your average holding horizon of a stock inside your portfolio?’ That should be the number one statistic if we want to measure long term investing,” she said.

“The industry has now gone down to less than two years [of holding horizon]. Sorry, that’s not long-term. So if you say you’re long term [investors], prove it.”

Another approach is to set up an appropriate long-term incentive structure, Geremia said.

“I don’t think paying on short-term performance – if you’re going to say you’re a long-term firm – is aligned. So change your compensation metric,” she said.

“We did quite a long time ago – we do not pay on short term results. It changes how people are managing the money, there’s no question about it.”

However, Geremia said these measures are not justifications for short-term underperformance, but the start of a conversation that aims to address a gap in industry expectations.

Like most “long-term active fund managers”, she said MFS aims to outperform over a full market cycle. Most of the industry define that as seven to ten years, but most can only tolerate underperformance for three years.

“A full market cycle is not one, it’s not three, and it’s not five years, yet the industry has anchored to those periods of time.

“Being a long-term active manager in the public markets is really uncomfortable.

“It is high hurdles, and difficult to think about how we measure long term or hold each other accountable for the future.

“There are some great ideas out there, and I’m inspired with what collective work we can all do.”