McKinsey study finds “long-term” companies outperform their shorter-term peers

Companies identified as “long-term” outperform their shorter-term peers according to new research from professional services firm McKinsey for FCLT Global, the investor/corporate coalition that promotes long-term investment.

FCLT Global, which is chaired by Blackrock’s Global Head of Active Equities Mark Wiseman, launched last September with members including oil giant BP and Singapore sovereign wealth fund GIC. Growing out of the pension fund backed-Focusing Capital on the Long Term initiative, FCLT Global will seek to promote long-term behavior among investors and companies through developing tools and research.

This week, it has launched a report with the McKinsey Global Institute entitled Measuring The Economic Impact Of Short-Termism that analyses 615 large- and mid-cap US listed companies from 2001-2015.

The analysis is based on patterns of investment, growth, earnings quality, and earnings management dubbed the “five-factor Corporate Horizon index”. One of the authors of the new study is McKinsey Worldwide MD Dominic Barton, one of the driving forces of FCLT with Wiseman when the latter was head of the Canada Pension Plan Investment Board.

The index is used to identify “long term” companies, and compared with shorter term peers, the report finds they outperform on a range of economic and financial metrics.

For example, from 2001-2014, the report says the revenue of long-term firms cumulatively grew on average 47% more than the revenue of other firms, and with less volatility.Also, long-term firms invested more than other firms from 2001 to 2014, and they continued to increase their research and development (R&D) spend during the financial crisis while other companies cut R&D expenditure.

And long-term companies exhibit stronger financial performance over time. On average, their market capitalization grew $7bn more than that of other firms between 2001 and 2014. Their total return to shareholders was also superior.

The report describes the work as the first step towards understanding the scope and magnitude of corporate short-termism, and says the agenda for further research will include looking at company-level drivers of short-termism and whether short-termism differs between sectors and industries.

FCLT Global currently has 17 members, including Dutch pension asset manager APG, La Caisse de dépôt et placement du Québec, the New Zealand Super Fund, State Street Global Advisors and Beijing-based Hillhouse Capital Group.

Last year six FCLT Global institutional investor members including GIC and the Canada Pension Plan Investment Board, committed $2bn to the S&P Long-Term Value Creation Global Index that reflects the philosophy of ‘long-termism’.

Separately, MSCI ESG Research has spoken of ‘Owning the Long Game’ as being one of its 2017 ‘trends to watch’. “The outset of 2017 marks an inflection point for institutions that purport to invest for the long term,” it says – adding that 2016 showed that “it’s the slow-burning risks that can matter the most”. The temptation will be to ‘time’ the market but for investors committed to the long term, 2017 may be the year for them to “differentiate themselves from the pack and orient towards future decades”.