By Trevor Hunnicutt
NEW YORK, March 22 (Reuters) - 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 .SPLTVCUN 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.
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 Inc MHFI.N 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.
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 was founded by CPPIB and management
consultant McKinsey & Co in 2013, counts senior management from
fund-managing companies BlackRock Inc (NYSE:BLK) BLK.N and State Street
Corp STT.N among its members and advisers.
DEFINING LONG-TERM
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 seem to develop strong policies on
legal compliance, environmental reporting and philanthropy. Such
practices, advocates like Winslow said, can predict performance
better than balance sheets.
Among the top companies in the index are health insurer
Cigna Corp (NYSE:CI) CI.N , coffee chain Starbucks Corp SBUX.O and
industrial conglomerate 3M Co MMM.N .
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 Inc ORLY.O , is also one of the largest
components of the S&P 500 Buyback Index .SPBUYUP .
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 Inc (NYSE:RAI) RAI.N and Altria Group (NYSE:MO) Inc MO.N , which
socially conscious investors often screen out.