Playing a bigger game

The world has shifted from a pandemic to a polycrisis, requiring us to build resilience and embrace transformational change. The “Playing a Bigger Game” framework encourages us to examine status quo, re-examine purpose and envision our desired future.

So, we must start by:

• Assessing where we are and how we got here
• Re-examining the purpose of the industry relative to the real world
• Facing our fear of getting it wrong – our “GULPS”
• Investing our energy differently
• Embracing new allies/organisations who can drive change
• Moving to Bold Action to ensure we can build better outcomes in a world of intense uncertainty

While everyone can play, the focus is on the investment system – those between investors and companies.

A macro perspective: where the misalignment begins

Over the past 30 years, the investment landscape has dramatically evolved. The Callan Institute's asset allocation study found that investors have to take on greater risk than they did 30 years ago.

More risk-taking has led to greater complexity in asset allocation decisions. It has also forced us into short term accountability focused on measuring past relative returns and leading us to a false sense of risk control.

The real misalignment is between time and risk and has created a paradox. On one hand, we're taking more risk, exposing investors and portfolios to greater potential losses. On the other hand, we have less time to manage the risk and are pressured to measure short-term performance at the expense of long-term value.

We can perhaps blame it on having low interest rates for far too long. There was nowhere else to go for returns, and as a result the need for professionally managed assets and advice exploded over the past several decades.

Collapse of time horizons

Ironically, as investment expertise significantly grew, capital markets and ownership of companies became dramatically shorter.

In 1945, institutional investors owned 10% of the US stock market. By 2022, that number had grown to 95%.¹ At almost the same time, the average holding period of a stock in the US fell from 96 months in 1950 to 5.5 months in 2022.² Even the average holding of a mutual fund is 3.9 years, whereas 30 years ago, that average was 16 years.³

Unintended consequences

In an investment landscape that has become riskier and much more short term, our attempt to mitigate risk by diversifying return streams has inadvertently introduced new, unchecked risks into the system, specifically:

1. The rise of passive investing, while offering cost efficiency and broad market exposure, has led to a massive concentration of ownership. It has not only affected the dynamics of capital markets but has also raised questions about the value and role of active management.
    
2. The decline of long-term, well-informed active management has far-reaching implications for corporate governance, shareholder engagement and valuing companies. As more investors turn to passive strategies, the role of active managers as stewards of capital and fundamental to price discovery has been drowned out.
    
3. The growth of alternative investments with a lack of transparency, illiquidity and higher cost poses another risk. Though they provide diversification and potential for high returns, they also introduce unique risks and complexities that need to be carefully managed.
    
4. The messy attempt to address systemic risk through ESG is under intense debate. While ESG factors have gained prominence in investment decision-making, the lack of standardisation, transparency and accountability in reporting and integration has created challenges and misunderstandings.

Because of the significant challenge these risks pose to the investment industry, we need to ask the big “GULP” question - are we simply moving capital or are we investing it? Are we investing in paper or real businesses? The answers will not only shape the future but determine how well we build resilience into our purpose and portfolios. We have an enormous opportunity to look at things differently.

Build trust

In 2015, a State Street global study on the asset management industry, called the "Folklore of Finance,” found that the industry spends too much time on the things that don't in fact add value to generating long-term returns or meeting investors’ long-term goals.

‘Bold Action’ required – rethinking measurement

The investment industry claims to be long-term focused, yet short-term behaviour persists. A Create Research study found 70% of institutional investors measure performance by relative returns, though many expect a shift toward absolute return metrics. This change could better align with end-investor goals and reduce short-term risk chasing.

As WTW highlights, we’re in a “messy middle,” between outdated alpha models and flawed ESG metrics, calling for a stakeholder era where long-term value creation is prioritised.

Some institutions are already evolving, especially those with in-house management, recognising the need for accountability in navigating systemic risks like ESG, cyber threats and artificial intelligence. Bold action is underway.

The Long-Term Stock Exchange promotes alignment and long-term thinking by pairing long-term investors with similarly minded companies. FCLTGlobal’s research shows companies that align capital with long-term strategies achieve stronger ROIC, R&D investment and reduced short-term pressure. These examples prove that bold, long-term thinking delivers real financial value.

Why take this on?

At MFS, two key questions drive us:

• What is the value of long-term active management?
• Are we aligned to Purpose?

Over the past 100 years, MFS has learned valuable lessons that have only reinforced the importance of our commitment to long-term returns through active management and the idea of transformation. We know bold action is required, and as active managers, our job is not to follow the herd but to ensure we are aligned with our purpose and the dual purpose of the industry.

We can lead and drive economic prosperity by playing a bigger game so investors can achieve their financial goals. Our history has taught us we need to be an organisation built to change with investors and for investors. We intend to innovate and partner on closing the gaps in alignment to build trust in what we do for the future.

At the same time, the Bigger Game can’t be played alone. It will take a collective shift in how we view value and how we operate as an industry. But we each can start by moving out of comfort zones and challenging the current norms, choosing innovation instead of indifference and building resilience in our current system.

Investors and our investable markets count on us to recognise misalignments and to change, overcome artificial barriers that hold us back from putting their money to work responsibly.

Click here for more insights via our White Paper on this topic

_{Sources
1 - Federal Reserve Report 2022 Federalreserve.gov.
2 - NYSE data conducted by Reuters.2022.
3 - Bogle, John C. The Mutual Fund Industry Sixty Years Later: For Better or Worse? Financial Analysts Journal. 2005.}
 

DISCLOSURE

_{The Callan Institute. “Risky Business.” https://www.callan.com/blog-archive/risky-business-2023/ The Callan Institute used their proprietary capital market projections to conduct asset allocation studies for clients in order to determine the risk associated with portfolios that are designed to generate an expected return. Callan has an optimizing tool to find what they call the “efficient frontier” or the right combination of assets to provide the highest return for the lowest risk.}

_{This material is for institutional, investment professional and qualified professional investor use only. This material should not be shared with retail investors.}

_{This material is for general information purposes only, with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. This material does not constitute any promotion of or advice on MFS investment products or services. The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice. Past performance or any prediction, projection or forecast is not indicative of future performance. Diversification does not guarantee a profit or protect against a loss. The information contained herein may not be copied, reproduced or redistributed without the express consent of MFS. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, MFS does not give any warranty or representation, expressed or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. MFS accepts no liability for any loss, indirect or consequential damages, arising from the use of or reliance on this material.}

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