New research released by the Centre for International Finance and Regulation (CIFR) may help to redress the so-called problem of short-termism in the financial markets by offering insights into how institutional investors might successfully adopt a long-term approach. The research also provides unique insight into the investment strategies deployed by the Future Fund, describing how the Fund works towards its long-term objectives.
The findings are presented in a three-part report titled “Long-Term Investing: An Institutional Investor Perspective”. The report argues that long-term investors are marked by two characteristics: they have discretion over when they trade; and they approach investing with their sights set on the long-term. It also identifies three broad advantages that long-term investors have over their more short-term focused counterparts.
The author of the report, Dr Geoff Warren, CIFR Research Director, said, “The first advantage we found is that with the removal of time pressure from the investment decision, long term investors can focus on if rather than when a particular investment return will be achieved. This allows them to pursue investments that may be avoided by those with shorter horizons, who are primarily concerned with getting a return as soon as possible.”
The second advantage of long-term investing relates to the ability to exploit opportunities arising from the actions of short-term investors; while the third is typically having greater latitude to invest in unlisted, illiquid assets and hence access a wider range of opportunities.
Dr Warren said that notwithstanding the advantages, there are several pitfalls associated with long-term investing. He said, “Arguably, the biggest dangers of long term investing relate to incorrect expectations about what the long term holds. The distant future is hard to predict; and investing based on a false premise can lead to money being tied up in an investment that underperforms for an extended period before the error is recognised.”
Part two of the study highlights a range of investment strategies that are well suited to long-term investors. It provides insight into how the Future Fund approaches some of these strategies, including a summary of the Future Fund’s approach to thematic investing. The Future Fund has identified seven secular themes that may influence the manner in which it invests. These are: debt and deleveraging; policy and politics; demographics; globalisation and emerging wealth; resource scarcity; technological innovation; and inflation. The Fund views the policy management of the deleveraging process in various parts of the developed world as the key current driver of global economic outcomes.
Part three of the study identifies four building blocks for constructing an investment organisation with a long-term horizon, including organisational orientation, incentive structures, the investment approach and trading discretion. A range of practical recommendations are put forward for addressing these building blocks; many of which are designed to build alignment with investing for the long-term right across the organisation.Dr Warren will present the findings of the study today at a CIFR Seminar in Melbourne. The seminar will include an industry panel on long-term investing, featuring the Future Fund’s Head of Investment Strategy and Risk, Stephen Gilmore.
