Your SlideShare is downloading. ×
0
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
PowerPoint
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

PowerPoint

237

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
237
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. James O’Loughlin, JOL Consulting Ltd Long Horizon Investing and Extra Financial Factors
  • 2. Two Questions <ul><li>Who put the “bop” in the “bop sh-bop sh-bop?” </li></ul><ul><li>Who put the “extra” in “extra financial factors?” </li></ul>
  • 3. Extra-Financial Factors <ul><li>Include but not restricted to </li></ul><ul><ul><li>Intellectual capital management </li></ul></ul><ul><ul><li>Human rights </li></ul></ul><ul><ul><li>Occupational health and safety </li></ul></ul><ul><ul><li>Human capital management </li></ul></ul><ul><ul><li>Innovation </li></ul></ul><ul><ul><li>Research and development (R&D) </li></ul></ul><ul><ul><li>Customer satisfaction </li></ul></ul><ul><ul><li>Climate change </li></ul></ul><ul><ul><li>Corporate governance </li></ul></ul><ul><ul><li>Consumer and public health </li></ul></ul><ul><ul><li>Reputation risk </li></ul></ul><ul><ul><li>Environmental and social impacts of corporate activity </li></ul></ul>
  • 4. Plan of the Presentation <ul><li>The opportunity for long horizon investing and enhanced analytics </li></ul><ul><li>A new generation of investor </li></ul><ul><li>How fund managers might use extra financial factors </li></ul><ul><li>Partnership for investing </li></ul><ul><li>The additional prize </li></ul><ul><li>Getting from here to there </li></ul>
  • 5. The Disconnect <ul><li>Sophisticated analysis </li></ul><ul><ul><li>DCF valuation models </li></ul></ul><ul><ul><li>Considered treatment of intangibles </li></ul></ul><ul><li>Short-term and narrow focus </li></ul><ul><ul><li>Earnings-based heuristics </li></ul></ul><ul><ul><li>Single period PE ratio analysis </li></ul></ul>
  • 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 <ul><li>Pattern recognition </li></ul><ul><ul><li>See what we expect to see </li></ul></ul><ul><li>Salience </li></ul><ul><ul><li>Tangibility </li></ul></ul><ul><ul><li>Measurability </li></ul></ul><ul><ul><li>Trustworthiness </li></ul></ul><ul><ul><li>Ambiguity aversion </li></ul></ul><ul><ul><li>Truncation </li></ul></ul><ul><ul><li>‘ Blindness’ </li></ul></ul>
  • 8. Extra-Financials Defined <ul><li>Not an artifact of the data </li></ul><ul><li>An artifact of our proclivity to pay attention to salient data and to process it according to learned models </li></ul>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 <ul><li>Industry-wide focus on narrow financial indicators of corporate performance </li></ul><ul><li>Diversity siphoned from investment decision making </li></ul><ul><li>Alpha left on the table for investors who know better </li></ul><ul><li>Widespread misallocation of capital </li></ul><ul><ul><li>With additional knock-on consequences </li></ul></ul>
  • 10. Enhanced Analytics for a New Generation of Investor <ul><li>Enhanced Analytics Initiative (EAI) </li></ul><ul><ul><li>Over $1 trillion under management </li></ul></ul><ul><ul><li>Minimum allocation of 5% of brokerage commission </li></ul></ul><ul><ul><li>Incentivises broader and longer-term perspective </li></ul></ul><ul><li>A new Generation of Investor </li></ul><ul><ul><li>Novel data in familiar and trusted format </li></ul></ul><ul><ul><li>Required knowledge </li></ul></ul><ul><ul><li>Appropriate models </li></ul></ul><ul><ul><li>Greater salience </li></ul></ul>
  • 11. Sources of Alpha <ul><li>Existing extra-financial information overlooked </li></ul><ul><ul><li>R&D intensity </li></ul></ul><ul><ul><li>Pro-shareholder corporate governance structures </li></ul></ul><ul><ul><li>Minority shareholder rights </li></ul></ul><ul><ul><li>Eco-efficiency </li></ul></ul><ul><ul><li>Human capital management </li></ul></ul><ul><li>New extra-financial information priced in slowly </li></ul><ul><ul><li>Accruals as extra-financials </li></ul></ul><ul><ul><li>Corporate governance </li></ul></ul>
  • 12. Corporate Governance as Exemplar
  • 13. The Case for Diversity <ul><li>Fund manager experience </li></ul><ul><ul><li>Expand set of variables </li></ul></ul><ul><ul><li>Deliver new perspective </li></ul></ul><ul><li>Radars retuned </li></ul><ul><ul><li>Relevant information finding them </li></ul></ul><ul><ul><li>Sufficient diversity not preordained </li></ul></ul>
  • 14. How Fund Managers Might Use Extra-Financial Factors <ul><li>Individuals </li></ul><ul><ul><li>Use a realistic model </li></ul></ul><ul><ul><li>Apply filters </li></ul></ul><ul><ul><li>Consult a checklist </li></ul></ul><ul><li>For organisations </li></ul><ul><ul><li>Join EAI </li></ul></ul><ul><ul><li>Develop in-house capability </li></ul></ul><ul><ul><li>Deliver data in usable form </li></ul></ul><ul><ul><li>Encourage desired behaviours </li></ul></ul>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 <ul><li>CEOs and CFOs </li></ul><ul><ul><li>Explain contribution of extra-financials </li></ul></ul><ul><ul><li>Enable comparison </li></ul></ul><ul><ul><li>Communicate consistently </li></ul></ul>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 <ul><li>Unions </li></ul><ul><ul><li>Reject dogma </li></ul></ul><ul><ul><li>Focus on systemic issues </li></ul></ul><ul><li>Trustees and consultants </li></ul><ul><ul><li>Develop indicators of short-termism </li></ul></ul><ul><ul><li>Gather evidence </li></ul></ul><ul><ul><li>Check quality of data </li></ul></ul><ul><ul><li>Review models </li></ul></ul><ul><ul><li>Build necessary resource </li></ul></ul>m k j i g l f h
  • 16. The “Additional” Prize <ul><li>Permanent gains factored into higher asset prices </li></ul><ul><ul><li>Productivity effect </li></ul></ul><ul><ul><li>Growth effect </li></ul></ul><ul><ul><li>Risk effect </li></ul></ul><ul><li>Better alignment of investment processes with long-term needs </li></ul><ul><ul><li>End beneficiaries </li></ul></ul><ul><ul><li>Investee companies </li></ul></ul>
  • 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 <ul><li>We put the “extra” in “extra-financial factors” </li></ul><ul><ul><li>Leaving alpha available </li></ul></ul><ul><ul><li>Misallocating capital </li></ul></ul><ul><li>EAI addresses oversight at source </li></ul><ul><ul><li>Redefines salience </li></ul></ul><ul><ul><li>Promotes diversity </li></ul></ul><ul><li>A new generation of investor emerging </li></ul><ul><ul><li>Informed partnership </li></ul></ul><ul><ul><li>Additional prize </li></ul></ul>
  • 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

×