'Active Investing': Three Possible Paths
“We find that the Canadian Coalition for Good Governance’s private engagements influence the adoption of shareholder democracy measures, say-on-pay advisory votes, and improve compensation structure and disclosure…”
“CAN INSTITUTIONAL INVESTORS IMPROVE CORPORATE GOVERNANCE THROUGH COLLECTIVE ACTION?”DOIDGE, DYCK, MAHMUDI, AND VIRANI (2015)
“We document outperformance following environmental, social, and governance (ESG) engagements by a UK institutional investor. After successful engagements, companies experience improvements in operating performance, profitability, efficiency, and governance.”
“ACTIVE OWNERSHIP”DIMSON, KARAKAS, AND LI (2012)
“Our strategy incorporates ESG factors holistically within a fundamental financial framework. Our high ‘due diligence’ focus, combined with the desire to maintain an active corporate oversight role with limited resources, leads to a concentrated portfolio…… but our ‘active ownership’ approach outweighs the risks embedded in this concentration….”
“REALLY INVESTING FOR THE LONG-TERM: A CASE STUDY”VAN DER VELDEN, VAN BUUL (2012)
Rethinking ‘Active Investing’
Our December Letter titled Professor Fama’s Folly: Financial Markets Are Efficient argued that while it may be impossible for ‘beauty contest’ investors to consistently outperform the market in the short-term, this is not the case for investors who focus on wealth-creation in the long-term. This Letter continues that theme by identifying concrete, practical pathways open to asset owners and institutional investors if they truly want to be wealth-creating long-term investors.
Specifically, we interpret the findings of published studies in three mutually-supportive contexts:
- A collective action approach with limited objectives, supported by a large group of like-minded asset owners and institutional investors.
- An individual ‘change agent’ approach on specific issues, with a single entity acting on behalf of a number of asset owners and institutional investors.
- An integrative investment approach, with a single entity empowered to implement a comprehensive long-term investment program on behalf of one or more asset owners.
Why is identifying concrete, practical pathways to successful long-term investing so important?