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In praise of long-termism

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  • In praise of long-termism

Liam Kennedy encourages the newly launched 300 Club to champion the long-term view.

As those who watched the 2006 film '300' will remember, the number refers to the band of Spartans who heroically fought against the Persians at the battle of Thermopylae in 480BC. A modern re-incarnation - the 300 Club - has been brought to life by Saker Nusseibeh, CIO at Hermes, and Alan Brown, CIO at Schroders, along with eight other senior figures in and around the investment management industry.

Although their battles may be metaphorical, the 300 Club's members have set themselves quite a challenge. First is the battle against industry certainties and a mindset rooted in the bull market years that persisted almost continually from the Second World War until recently. This has often prioritised 'me too' product development over real innovation in the asset management industry.

A more intractable battle is the wider issue of regulation, not least because regulators (both national and supra-national) are increasingly recognised as key drivers of risk and asset allocation behaviour.

Far from spurring institutional investors and pension funds to invest in the true long-term interest of their members and clients, the contention is that regulation designed to promote the security of pension and other entitlements drives herd-like pro-cyclical behaviour as funds try to de-risk at the same time. Investors themselves then contribute to driving down asset prices and liability benchmarks, further perpetuating a negative cycle.

Pension solvency and funding rules often rest on shaky foundations - there seemingly existing no better model than Basel-type capital adequacy rules that require variable capital buffers according to the historical risk of the asset class and a VAR-type calculation that is itself backward looking and likely flawed.

Is it really 'prudent' in the long term that French, German and other insurers (and some pension funds) already invest just 2-3% of their portfolios in equities?

As we have seen in the Netherlands, the idea of predictable 97.5% or 99.5% 'certainty' of coverage ratio is a nonsense in recent events when the real outcome has been dramatic shortfalls, indexation freezes for pensioners and contribution hikes to cover the shortfalls.

And international accounting standards have promoted marking to market of liabilities, even though the real benchmark - the liabilities themselves - contains a large margin of error in predictability over the long term.

The 300 Club will do well to speak up in favour of long-termism within the investment industry and the regulatory frameworks that bind it. Perhaps sensibly, they have not yet set a benchmark for their success, but I, for one, look forward to measuring their progress.

 

Liam Kennedy is editor at IPE

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