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  • 1. James O’Loughlin, JOL Consulting Ltd Long Horizon Investing and Extra Financial Factors
  • 2. Two Questions
    • Who put the “bop” in the “bop sh-bop sh-bop?”
    • Who put the “extra” in “extra financial factors?”
  • 3. Extra-Financial Factors
    • Include but not restricted to
      • Intellectual capital management
      • Human rights
      • Occupational health and safety
      • Human capital management
      • Innovation
      • Research and development (R&D)
      • Customer satisfaction
      • Climate change
      • Corporate governance
      • Consumer and public health
      • Reputation risk
      • Environmental and social impacts of corporate activity
  • 4. Plan of the Presentation
    • The opportunity for long horizon investing and enhanced analytics
    • A new generation of investor
    • How fund managers might use extra financial factors
    • Partnership for investing
    • The additional prize
    • Getting from here to there
  • 5. The Disconnect
    • Sophisticated analysis
      • DCF valuation models
      • Considered treatment of intangibles
    • Short-term and narrow focus
      • Earnings-based heuristics
      • Single period PE ratio analysis
  • 6. Pattern Recognition
  • 7. The Investor’s Task Equity Value ROIC Cost of Capital Pricing Profit Margins Sales Growth EPS M&A Corporate Gov’nce m k j i g l f h
    • Pattern recognition
      • See what we expect to see
    • Salience
      • Tangibility
      • Measurability
      • Trustworthiness
      • Ambiguity aversion
      • Truncation
      • ‘ Blindness’
  • 8. Extra-Financials Defined
    • Not an artifact of the data
    • An artifact of our proclivity to pay attention to salient data and to process it according to learned models
    Extra-financial factors are those which are likely to have at least a long-term effect on business results but which lie outside the customary span of variables that get integrated into investment decisions, irrespective of whether they are part of the research process.
  • 9. The Opportunity for Long Horizon Investing and Enhanced Analytics
    • Industry-wide focus on narrow financial indicators of corporate performance
    • Diversity siphoned from investment decision making
    • Alpha left on the table for investors who know better
    • Widespread misallocation of capital
      • With additional knock-on consequences
  • 10. Enhanced Analytics for a New Generation of Investor
    • Enhanced Analytics Initiative (EAI)
      • Over $1 trillion under management
      • Minimum allocation of 5% of brokerage commission
      • Incentivises broader and longer-term perspective
    • A new Generation of Investor
      • Novel data in familiar and trusted format
      • Required knowledge
      • Appropriate models
      • Greater salience
  • 11. Sources of Alpha
    • Existing extra-financial information overlooked
      • R&D intensity
      • Pro-shareholder corporate governance structures
      • Minority shareholder rights
      • Eco-efficiency
      • Human capital management
    • New extra-financial information priced in slowly
      • Accruals as extra-financials
      • Corporate governance
  • 12. Corporate Governance as Exemplar
  • 13. The Case for Diversity
    • Fund manager experience
      • Expand set of variables
      • Deliver new perspective
    • Radars retuned
      • Relevant information finding them
      • Sufficient diversity not preordained
  • 14. How Fund Managers Might Use Extra-Financial Factors
    • Individuals
      • Use a realistic model
      • Apply filters
      • Consult a checklist
    • For organisations
      • Join EAI
      • Develop in-house capability
      • Deliver data in usable form
      • Encourage desired behaviours
    Equity Value ROIC Cost of Capital Pricing Profit Margins Growth Brand Power M&A Corporate Gov’nce m k j i g l f h Minority Rights Climate Change R&D Eco Efficiency Staff Training
  • 15. A Partnership for Investing
    • CEOs and CFOs
      • Explain contribution of extra-financials
      • Enable comparison
      • Communicate consistently
    Equity Value ROIC M&A Corporate Gov’nce Minority Rights Climate Change R&D Eco Efficiency Staff Training e e e e e e e e
    • Unions
      • Reject dogma
      • Focus on systemic issues
    • Trustees and consultants
      • Develop indicators of short-termism
      • Gather evidence
      • Check quality of data
      • Review models
      • Build necessary resource
    m k j i g l f h
  • 16. The “Additional” Prize
    • Permanent gains factored into higher asset prices
      • Productivity effect
      • Growth effect
      • Risk effect
    • Better alignment of investment processes with long-term needs
      • End beneficiaries
      • Investee companies
  • 17. Getting to Here from There RED GREEN BLUE BLACK ORANGE BROWN PINK GREEN RED BLUE GRAY YELLOW BROWN BLACK PINK RED GREEN ORANGE GREEN YELLOW BLACK BLUE GREEN BLUE RED
  • 18. Getting to Here from There RED GREEN BLUE BLACK ORANGE BROWN PINK GREEN RED BLUE GRAY YELLOW BROWN BLACK PINK RED GREEN ORANGE GREEN YELLOW BLACK BLUE GREEN BLUE RED
  • 19. Conclusion
    • We put the “extra” in “extra-financial factors”
      • Leaving alpha available
      • Misallocating capital
    • EAI addresses oversight at source
      • Redefines salience
      • Promotes diversity
    • A new generation of investor emerging
      • Informed partnership
      • Additional prize
  • 20. The Lexicon of Investing “ When an investor systematically integrates all relevant variables into their decision making there is no such thing as an extra-financial factor: just enhanced analytics.” Hendrik du Toit
  • 21. Seeing What We Expect to See
  • 22. Corporate Governance as Exemplar