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Kempen's Commentary: Long-term vision instead of short-term panic

17 April 2020

 

Long-term vision instead of short-term panic

What shall we do? This question dominated almost all conversations I had with relationships in the past few weeks. The corona crisis has no equal. You have undoubtedly seen the graphs in which the current crisis is compared with that of 2008 and 1929.

We live in very uncertain times. It may not even be the depth of the fall that is surprising, but the sheer speed of it. And it wasn’t thunder from a clear sky either, as many of our relations were already afraid of heights before this crisis. Many already seemed to wonder when it would strike, considering the exceptionally long cycle we were in. 

I certainly do not want to minimise the losses on the stock market. But I do think it’s good to keep putting this crisis in perspective. The value of each share is ultimately determined by incorporating future cash flows and thus by subjective opinions. Everything impacts that opinion and the stock market climate is suddenly very gloomy now.

However, we should stay focused on the long-term perspective. And by that I don’t mean that we should follow that line uncritically: everything will be fine in 30 years. By looking at the long term I mean understanding the fundamentals on which this perspective is built.

For us as active investors, it is mainly about the quality of the companies. The idea is not to be blinded by the short term and relentlessly cut the losses, but to keep the companies with solid long-term fundamentals based on the assessment of quality.

In addition, it’s our role as active owners to let companies know that we support them in their short-term pain, so that we can reap the long-term gain together. We do this in the full conviction that this long-term support brings us more than short-term panic.

A recent example is the French car supplier Valeo. We increasingly see discussions about capital allocation and dividend payments. The French government is even considering banning dividend payments for some companies. We contacted Valeo and indicated that the most important thing for us is that the companies we invest in take decisions in the interest of all stakeholders. Business continuity is the most important factor in this decision-making process. In that regard, we have expressed support for making the best assessment of capital allocation, including dividends.

Another example is the Swiss pharmaceutical company Roche Holding. This company has been in the news recently for its unwillingness to instantly announce the composition of a liquid required for testing for COVID-19. We discussed this with Roche and checked facts and fairy tales. And we insisted that health prevails over profit. Roche replied that the test liquid shortage had been resolved and that they would fully cooperate with the Dutch government. The safety and complexity of manufacturing the liquid clearly played a role in coming to a practical solution.

One of the most important lessons learned from this crisis is that there must be a more balanced long-term weighing of interests between all stakeholders. Forced by short-term shareholder interests, the world has gone too far in optimising efficiency rather than resilience. It turned out that no one was prepared for a pandemic with such devastating global effects in 10 weeks. We do, however, need to be prepared for the climate and energy transition that will affect us in the next 10 years. 

Close to home in the investment value chain, one of the solutions is to achieve a much better balance of interests between asset owners, asset managers and the business community. For this reason, Van Lanschot Kempen as an organisation and employees, such as the fund managers, have invested in our funds with their own capital for fifteen years. The pain of the falling stock market is therefore not only felt by our clients. We also have, as we call it, skin in the game.

We called this way of investing ‘the real active’. It’s a way of operating that turns investing into a craft again by being in an ongoing dialogue with a concentrated portfolio of companies about the long-term value creation for all of their stakeholders. And in this way restore the disconnect between the financial and the real economy. For us, real active is our navigation. We are confident that another time will come. That’s why we invest in the sustainable winners of the future i

 


i You can read more about this in our Annual Stewardship and Responsible Investment Report, which will be published on our website on 21 April.

The author

Lars Dijkstra

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