A long-term approach is now more vital than ever, says Schroders› CEO. Companies should be supported - but with conditions.
The measures designed to slow the spread of the Covid-19 pandemic will test the finances of individuals and companies to breaking point in the months ahead.
The asset management industry will face its own test. It’s a practical test of how we can support otherwise healthy and viable businesses. It’s also a philosophical test of whether we are true long-term investors.
As custodians of savers’ money, it is the role of investment managers to allocate capital to companies with long-term, sustainable business models.
But even the most forward-thinking of companies are today facing unprecedented short-term shocks. For some, it will threaten their survival.
How do we act?
One thing is clear. There are many, many great businesses that were delivering value to shareholders in the run-up to this crisis. It’s imperative for the future wealth of the savers we serve that these businesses are not lost due to the extraordinary events that now surround us.
Fund managers can help with this. As an industry we should be holding honest and open conversations with company management teams on the problems they face. We should be working together to seek inventive solutions.
I would encourage companies to talk to us. I have also asked our portfolio managers to open these critical conversations with companies as we attempt to identify the most pressing challenges. We will talk, individual to individual, to solve them. I have no doubt that some of those solutions will be highly creative; they will only be reached with this sort of human interaction.
In contrast, the shortcomings of mechanised trading will come into sharper focus. The answers will not be conjured up by arms-length algorithmic investment management.
We must work together
Equally, fund managers cannot solve this alone. We must work together with governments, with other shareholders and with banks. We can be supportive when it comes to equity raising for companies, but it only works if the authorities are involved, as well as lenders. Like us, they must also apply imaginative thinking.
Much is at stake. The livelihoods of millions of people will be affected by how we act in the coming months.
I see it as our role to reject short-term opportunists who are seeking to capitalise on price distress. Companies with strong long-term prospects should be supported.
But this support is not offered unconditionally
First, all measures of support should be carefully targeted. As representatives of asset owners, it is incumbent on us to ensure, for example, that well-intentioned help secures the future of employees rather than executives.
The companies receiving support must demonstrate the strength of their social contract with stakeholders. If investors are demonstrating flexibility, company executives should do the same in how they treat employees, suppliers and customers alike. We will be watching closely and actively engaging where necessary.
Secondly, we have a responsibility to help deliver long-term returns for the savers we represent. This is not achieved by handing capital to businesses that have not addressed fundamental weaknesses in their models. That rule must never change.
All stakeholders will inevitably face some pain. Investors have already faced falls in the value of their equity investments. It is inevitable that many companies will also need to suspend dividend payments – perhaps even those that have already been declared.
Despite the intensity of events in the here and now, this is the time for long-termism. Schroders has survived many market crises over its 216-year history by following that philosophy.
Our responsibility today is to ensure industries are supported, that they aren’t engulfed by short-term turbulence. Long-termism must win out.
- This perspective first appeared in the Financial Times