Analysis: Long-term investors – all talk, no walk?
For all the talk from institutional investors about being long-term, they aren’t.
In fact, it’s a load of, well, “BS”.
So said Stan Dupré, founder and CEO of the 2° Investing Initiative, when he spoke to IPE about new research it has carried out with the Generation Foundation, a not-for-profit advocacy initiative of Generation Investment Management. The research was conducted under a “Tragedy of the Horizon” research programme into short-termism in the finance sector.
But before your eyes gloss over…
Dupré acknowledged that one of the reactions the organisations get is that this topic is “nothing new under the sun”, and that failings of short-termism have been “on the agenda for basically as long as capitalism exists”.
“Some asset managers claim to perform long-term research internally, but we didn’t have evidence of fundamentally long-term oriented buy-side research”
The research developed by the 2° Investing Initiative and Generation Foundation is different, he argued: it is not about the short-termism of financial markets, but about the short-termism of supposedly long-term investors.
A traditional response to short-termism accusations is that markets need both short- and long-term investors, Dupré said.
Large asset owners such as pension funds may say they manage their money with a long-term view because they have liabilities of, say, 30 years – but this, Dupré argues, is “BS”.
The organisations failed to identify “a single long-term investor“ in the course of their research, he said.
Dupré’s claims are based on the findings behind two reports produced so far by the 2° Investing Initiative and Generation Foundation under their joint research programme.
One, entitled “All Swans Are Black in the Dark”, argues that equity research analysts and credit rating agencies miss risks to the long-term viability of companies because they tend to only look three to five years ahead. A lack of demand from investors for long-term research is at least partly to blame, it says.
The other report, entitled “The Long and Winding Road”, is based on a study of equity portfolio turnover carried out by Mercer Investment Consulting. It analysed 3,500 long-only institutional equity portfolios from 2004 to 2016 and found they were managed “with short-term horizons, turning them over every 21 months on average”.
Dupré told IPE that the organisations set out to find investors who commission, expect, and/or use long-term research. They did not identify analysts who highlighted this type of client or demand, nor asset managers who commission or use long-term research.
“Some asset managers claimed to perform this kind of long-term research internally, but we didn’t have evidence of fundamentally long-term oriented buy side research,” he added.
This is not to say that long-term investors don’t exist, according to Dupré.
”What we say is that they are at best very rare, and clearly [do] not create demand for long-term analysis (equity or credit) on the market.”
He said the research could spur regulatory action.
The study on portfolio turnover points to a “huge” principal-agent concern, with it being “really sub-optimal” to have investors turning over portfolios so frequently when they are supposed to maximise returns with a longer horizon, Dupré said. The research found no evidence of any attempt among asset managers or asset owners to backtest the level of turnover and to understand if lower turnover would benefit returns. Dupré suggested this could amount to a breach of fiduciary duty.
He also noted that long-termism is a topic on the agenda of the “High Level Expert Group on Sustainable Finance” that was recently set up by the European Commission. His expectation was that “if we [do] a good job in the next few months” there will be “policy responses” from the financial services department in the Commission (DG Fisma), he said.
The reports can be found here.