New index puts long-term investors to useful test

By Rob Cox
January 21, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The long-term investment brigade just got a metric by which to prove its mettle – or a petard from which to hang. Institutions and politicians that have decried the ephemeral thinking that has crept into boardrooms, compensation committees and market-makers will now have their own global stock index. With some fast-growing companies failing to make the cut, it’s a bold experiment.

Canada’s Pension Plan Investment Board, which oversees C$273 billion of assets, is leading a group that will allocate $2 billion to the new S&P Long-Term Value Creation (LTVC) Global index. The investors, including Singapore’s GIC, New Zealand’s Superannuation Fund, Ontario Teachers’ Pension Plan, PGGM of the Netherlands and Denmark’s ATP Group, expect others to follow – and investment firms like BlackRock to create products pegged to the new index.

The aim is a worthy one. S&P, a unit of McGraw Hill Financial, which is partnering with RobecoSAM, will evaluate annually companies for inclusion based on quantitative and qualitative criteria. The former will include a combination of earnings, liabilities and profitability measurements, with a strong emphasis on return on equity, leverage ratios and the way assets are accrued on balance sheets.

Where the index appears to diverge most from others will be in its assessment of qualitative measures like board independence and management incentives. It also will vector in issues around supply-chain management and tax strategy that could create business or reputational risks. Most controversial of all will be the possible exclusion of companies with super-voting share structures.

Alphabet, the parent company of Google, and Facebook appear to have been excluded from the first iteration of the index. Alphabet, which has three classes of stock, has seen its value surge by nearly 40 percent over the past year. At Facebook, where founder Mark Zuckerberg uses super-voting stock to keep a firm grip on his dorm-room creation, the shares have gained around 25 percent. The S&P 500 Index has lost about 8 percent over the same period.

The founders at both companies argue, ironically enough, that it is their multiple-share structures that helps them think for the long term, without distractions like quarterly guidance or pushy investors banging at the door. Mark Wiseman, who runs CPP Investment Board, argues that over the longer term such structures misalign managers and owners.

If this new index takes off, both sides finally will have some data with which to make their points. It just probably won’t happen in the short term.

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