Tag: time horizon

Survey: Pension Funds Disagree on Time Horizon of Long-Term Investing

IPE long term investor

The results of a new survey from IPE magazine reveal that the world’s pension funds agree they are long-term investors. But there is disagreement about what “long-term” actually means.

From Investments & Pensions Europe:

One-quarter of respondents to the Focus Group survey for the November issue of IPE said 3-5 years constituted a ‘long-term’ view, while nearly 78% of respondents considered themselves to be long-term investors.

Only one respondent rejected the label outright.

One UK pension investor pointed to the need for a long-term approach based on long-term liabilities, while an Austrian pension fund argued that it was important to take a generational view – at least when managing the assets of beneficiaries up until 45.

There was less agreement among the 36 European respondents, managing nearly €290bn in combined assets, as to what constitutes ‘long term’ when investing in public market assets.

More than one-third of pension investors said taking a 7-10 year view was long term, whereas nearly 14% believed the better definition was considering investments over the course of a business cycle.

One-quarter of funds said a 3-5 year time horizon was adequate, and 17% argued in favour of a generational view, spanning 15-25 years.

One respondent, a UK local authority scheme, said the long-term perspective manifested itself in asset allocation decisions, pointing to the development of emerging markets over the course of a generation.

The fund added: “Stock selection does tend to take a shorter view, and this is probably dysfunctional.”

A second UK corporate fund questioned whether the idea of long-term investing in public markets was compatible.

“The idea that long-term investment should be public market inherently seems to be at odds with long-term investing,” it said.

“Public markets are driven by short-term liquidity and [mark-to-market] ideology, which is anathema to long-term investing, which is about long-term, sustainable cash flows.”

Despite this, nearly half of respondents did not see a problem in finding external public market asset managers “willing and able” to invest for the long term, and only 9% rejected the notion out of hand.

One-quarter of respondents said asset managers could be found, but only for certain asset classes.

A Swedish investor blamed the regulatory environment, not asset managers.

“[The] main hassle is the short-term view of the regulator and new regulations where you value your liability against a short-term model,” it said.

A second Swedish investor concurred.

“If anything,” it said, “regulation is a problem – in particular, its tendency to change radically every 5-10 years.”

When asked which factors prevented long-term investing, 24% cited the regulatory environment and 21% the maturity of their liabilities.

Only 20% said the asset management industry’s unwillingness or skill was at fault.

One respondent cited the career risk of misguided long-term investments.

For more, see IPE’s analysis here.

The Case For Long-Termism in Pension Investments

balance

Pension funds, more so than other investors, operate on a particularly long time horizon.

But that doesn’t mean funds can’t succumb to short-term thinking.

Keith Ambachtsheer, Director Emeritus of the International Centre for Pension Management at the University of Toronto, makes the case for more long-term thinking at pension funds in a recent paper published in the Rotman International Journal of Pension Management.

He lays the groundwork of short-term thinking at pension funds by presenting this statistic:

My 2011 survey of 37 major pension funds found that only 8 (22%) based performance-related compensation on measures over four years or more.

In other words, pension funds aren’t rewarding long-term thinking. But how can that be changed? From the paper:

A good start is to insist that the representatives of asset owners become true fiduciaries, legally required to act in the sole best interest of the people (e.g., shareholders, pension beneficiaries) to whom they owe a fiduciary duty….the resulting message for the governing boards of pension and other long-horizon investment organizations (e.g., endowments) is that they must stretch out the time horizon in which they frame their duties, as well as recognizing the interconnected impact of their decisions on multiple constituents to whom they owe loyalty (e.g., not just current pension beneficiaries but also future ones).

Increasingly, fiduciary behavior and decisions will be judged not by a cookie-cutter off-the-shelf “prudent person” standard by a much broader “reasonable expectations” standard.

A logical implication of these developments is that the individual and collective actions of the world’s leading pension funds are our best hope to transform investing into more functional, wealth-creating processes.

It will take work, but a shift to long-termism will be worth it, according to the paper:

Institutional investors around the globe, led by the pension fund sector, are well placed to play a “lead wagon” fiduciary role as we set out to address these challenges. Indeed, the emerging view is that pension sector leaders have a legal obligation to look beyond tomorrow, and to focus the capital at their disposal on the long term.

Will the effort be worth it? Logic and history tell us that the answer is “yes.” Qualitatively, long-termism naturally fosters good citizenship; quantitatively, a 2011 study that calculates the combined impact of plugging the upstream and downstream “leakages” in conventional investment decision making with a short-term focus found that the resulting shift to long-termism could be worth as much as 150 basis points (1.5%) per annum in increased investment returns (Ambachtsheer, Fuller, and Hindocha 2013).

Read the entire paper, titled The Case for Long-Termism, here [subscription required].