It remains exceptionally difficult in today’s financial backdrop to invest with a long-term horizon in mind. Especially given that investors tend to judge performance more-so on short-term results. So begs the question, can you actually take the ‘long-view’ without being continually judged on short-term performance? Well some large investors believe that it’s not only possible – but potentially the only option to deliver results.
I recently read about the ‘Long-Term Portfolio Guide’ (LTPG) which was developed by Anuradha Gurung with co-editor Colin Carlton and a working group, co-led by Caisse de dépôt et placement du Québec and Canada Pension Plan Investment Board. The working group was comprised of more than 20 experienced investment professionals from BlackRock, Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board, Capital Group, GIC, New Zealand Superannuation Fund, Ontario Teachers’ Pension Plan, PGGM, and Washington State Investment Board.
The objective of the initiative is to reorientate portfolio strategies and investment management to focus capital on the long term.
As highlighted in the LTPG introduction, since the 2008 financial crisis, there has been plenty of discussion about the perils of short-termism, but concerted action to remedy them is lagging. In “Focusing Capital on the Long Term,” a Harvard Business Review article published in January 2014, Dominic Barton of McKinsey & Company and Mark Wiseman of the Canada Pension Plan Investment Board argue that “the single most realistic and effective way to move forward is to change the investment strategies and approaches of the players who form the cornerstone of our capitalist system: the big asset owners…Action must start with [them]. If they adopt investment strategies aimed at maximizing long-term results, then other key players—asset managers, corporate boards, and company executives—will likely follow suit”.
In a recent survey of public and private pension plans and sovereign-wealth fund managers, respondents overwhelmingly agreed that while the ability to invest long term is an advantage, they do not necessarily have an effective set of implementation strategies/tools to help them realise their aspirations to be long term.
The LTPG is the result of the working groups collaboration on provides recommendations across five core action areas that all institutional investors must consider: investment beliefs, risk appetite statement, benchmarking process, evaluations and incentives, and investment mandates. They believe these five areas collectively provide a framework for institutional investors to improve long-term outcomes for their portfolios, their investee companies, and ultimately for all stakeholders.
I find it interesting when looking at how they define ‘Long-term investing’…
- is a frame of mind rather than a holding period, and a culture rather than a directive
- is about making investment decisions with a sustainable future-oriented perspective
- takes advantage of opportunities created and/or unable to be taken by short-term investors
- emphasises process and fundamental long-horizon corporate research rather than focusing solely on quantitative data analyses • requires persistence through periods of short-term underperformance and reaps the rewards of patience
- is not a continuing sequence of short-term investments nor simply about buying and holding assets
- is not driven by rankings or benchmarks (it is not a “beauty contest”), but focuses on long-term expectations and outcomes
- is consistent with the time horizons and ultimate needs of most savers by providing asset owners with the ability to meet liabilities today and for many years into the future
The recent global financial crisis created an opportunity that has been missed to reorientate our investment philosophy towards the long-term, where most of the capital was directed towards the pursuit of short-term gains. Infrastructure for example, is only now on investors and governments radar. I hope the initiatives being proposed by the FCLT group will provide the foundation for long-term investing. It will deliver positive outcomes for not just the holder of assets, but also to those that manage them.
Link to: Focusing Capital on the Long-Term.