New Index Targets Long Term Thinking

New ETF focusing on companies that shun short-term gains could be on the way.

Reviewed by: Trevor Hunnicutt
Edited by: Trevor Hunnicutt
S&P Dow Jones Indices is negotiating with asset managers to license its new index, which it says represents companies that focus on the long term rather than the current quarter.

The Long-Term Value Creation Global Index could be the basis for one or more mutual funds, exchange-traded funds or structured products, Vinit Srivastava, S&P's senior director of equity strategy, said in an interview last week.

S&P created the index over the past year in response to concerns that company executives, under pressure from hard-charging board overseers and the earnings calendar, have put short-term wins ahead of building businesses that thrive over time.

‘Stop That Short-Term Focus’

Designed with the help of the Canada Pension Plan Investment Board, the index consists of companies with what S&P considers strong corporate-governance plans and solid financial numbers.

"We have to do things to stop that short-term focus," said Poul Winslow, managing director at Toronto-based CPPIB. He said the index relied on a scoring system that draws out important details about how companies are governed.

The CPPIB and other institutional investors have committed $2 billion to private funds tracking the index.

S&P, a unit of McGraw Hill Financial, and, the largest provider of indexes tracked by U.S.-listed ETFs, has not decided whether such a license would be exclusive to one asset manager.

Srivastava declined to name any bidders or comment further on the discussions. Bringing such a product to market could take several months of planning and regulatory approvals.

ETF Issuers Already Have Similar Focus

Asset managers have already had something of a hand in the effort. Focusing Capital on the Long Term, a group that advocated for the index and which was founded by CPPIB and management consultant McKinsey & Co in 2013, counts senior management from ETF issuers BlackRock Inc. and State Street among its members and advisors.

To come up with its index, S&P starts with the largest public companies and allocates money to those that produce a hefty return on equity and that seem to develop strong policies on legal compliance, environmental reporting and philanthropy. Such practices, advocates like Winslow say, can predict performance better than balance sheets.

Among the top companies in the index are health insurer Cigna, coffee chain Starbucks and industrial conglomerate 3M.

Buybacks OK

However, the index does not screen out companies that spend cash buying back their own shares, even though such repurchases have been criticized by investors who would rather see the money go to long-term ventures like capital expenditures or workforce development.

One of the long-term index's top holdings, retailer O'Reilly Automotive, is also one of the largest components of the S&P 500 Buyback Index.

Srivastava said companies with good governance rules tend to do buybacks "for the right reasons."

The index's focus on corporate governance does not necessarily mean a focus on social issues, even though pension funds often consider such criteria.

Two of the index's top 10 holdings are tobacco companies Reynolds American and Altria Group, which socially conscious investors often screen out.

Trevor Hunnicutt is a staff writer for Reuters.