How a Long-Term Approach Boosts Returns

Willis Towers Watson offers an estimate of how much more investors can earn by sticking to a long horizon.


Sticking to a long-term investment approach can really pay off.

Long-horizon investors may earn as much as 1.5 percent in additional returns annually, according to new research from Willis Towers Watson’s Thinking Ahead Institute. The report, featuring input from firms including Hermes Investment Management, U.K. pension manager RPMI Railpen and Investec Asset Management, examined how long-term investors can add value to their portfolios. It also looked at short-term pitfalls that limit potential gains.

“We are more certain than ever that the costs of developing the mindset and acquiring the skill sets to address long-horizon investing challenges are substantially outweighed by the return enhancements,” said Michael Garcia, director of Willis Towers Watson’s Thinking Ahead Group, in a statement Wednesday.

Among the return opportunities cited in the report were the well-documented illiquidity premium – the compensation investors earn for locking up capital – and the ability to exploit mispricing through smart beta strategies.

The consulting firm said that long-horizon investors can profit at the expense of short-term investors, who might sell assets below “fair value” in exchange for liquidity during times of market stress. They avoid the losses that come with buying high and selling low, as well as value-destroying, liquidity-driven sales, said Willis Towers Watson, estimating forced selling could lower returns by 1.5 percent to 2 percent annually.


A long-term approach means less trading, resulting in “significant savings” on transaction costs, the firm noted.

The report cited studies from McKinsey & Co. and Wilshire Associates that showed corporate engagement and ownership of long-term oriented firms also led to higher returns. For example, companies targeted by the California Public Employees’ Retirement System produced excess returns of 12.3 percent in the five-year period following corporate engagement by CalPERS, according to the report.

“Capturing the benefits of long-horizon investing is likely to require a major shift of mindset and significantly expanded skill sets by investors,” Garcia said. “It is reasonable to assume the long-horizon premium exists precisely because it is so hard to capture.”