Analysis: Long-term investors – all talk, no walk?

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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”

Stan Dupré

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.

Regulatory action?

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.

Readers' comments (1)

  • I think the criteria being applied here to determine who is a "long-term investor" are utterly unrealistic. Continuing to hold the same position for ten or twenty or however many years the authors of this study deem necessary is not proof one is a long-term investor, it is proof that one is either a member of a core control group or that one is indexed, and that this particular index constituent has remained in the benchmark for the entire time. Investing for the long term means evaluating the long-term prospects of a company and holding a position which meets those criteria for as long as they are appropriately discounted in the present share price. If the price significantly exceeds those bounds, the position should be sold, and not repurchased, until and unless the share price returns to less than the long-term discounted value of that company using reasonable investment criteria. Similarly, if the long-term prospects of the company change for the worse, the position should be re-evaluated and sold, if it appears that the price is no longer justified. IT DOES NOT MEAN that the active long-term investor should hold onto the position through thick and thin no matter what, until death do them part.

    A long-term investor factors into valuations both sustainability criteria (which may indicate that one company should be sold, as well as that another ought be held), and the potential discounted value of projects which might not ripen for five or even ten years. It is neither a marriage nor a suicide pact.

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