What ‘Long-Term Investor’ Really Means
It’s not just following the index, writes Campbell Macpherson, CEO of Change & Strategy International.
Every asset owner I have met proclaims they are a long-term investor in much the same way that every CEO declares that their greatest asset is their people – automatically and without thinking about it too much.
It has become almost a throw-away line. Many of us haven’t paused to properly define what it means to be a long-term investor, allowing myths to take hold and distort its true meaning.
Some of these common misconceptions are that long-term investing means taking your hands off the tiller, or just investing according to the index. While staying calm during a downturn is indeed a critical quality of any long-term investor, complacency can also be a killer. “It’s okay, we are investing for the long term” should never be used as an excuse for poor short- or medium-term performance.
As for indexes, they are merely snapshots in time. The companies within them are not selected on an overt assessment of the company’s sustainability or longevity. After all, only 28 of the original FTSE 100 companies remain in the index today, 34 years on.
On the other end of the spectrum, there are those who believe long-term investing means investing in illiquid assets. But it is not enough to simply invest in the so-called illiquid asset classes of real estate, private equity, and infrastructure. Long-term investors invest for the long term across every asset class – not just private markets. Locking up capital in a real estate project or a private equity fund should be no different than locking up capital in publicly listed stocks. The fact that you could sell your public market equities at the drop of a hat doesn’t mean you should – or will, for that matter.
Another myth is that the long term is “really just a series of short terms.” These are the exact words that the CIO of one of the world’s leading active fund managers said to me. While it is obviously true in a very literal sense, the inherent short-term nature of the statement is fraught with danger.
Far too much shareholder value is already being lost by the corporate world’s obsession with quarterly reporting cycles. Analysis by McKinsey and FCLT Global concluded that long-term companies delivered $7 billion more in market capitalization per firm between 2001 and 2014 than short-term peers.
Of course the definition of long term depends upon your investment horizon. And of course your investment horizon will depend upon your fund’s liabilities and cash flow requirements. For some investors, long term can mean 10 years, while for others it could be multi-generational.
But this debate is a distraction. The better question is: “What does being a long-term investor mean for your organization?”
Being a long-term investor is about attitude, not timeframes. It requires a confidence based on clarity of purpose, clear research, and insightful analysis. A long-term investor is bold enough to speak up about the dangers of short-termism and brave enough to address the issue within their own organization.
Culture is key, and an organization’s culture is the one that its leaders create. It’s up to them to focus on the long-term rather than quarterly or annual performance, to be consistent, and to genuinely encourage challenging the status quo.
To incentivize people to think, act, and deliver like long-term investors, organizations need to bridge the gap between long-term investment performance goals and the relatively short-term nature of careers and annual compensation. Some institutional investors tackle the problem by measuring the performance of their portfolio managers over a blend of one-, three- and five-year performance. However, this isn’t perfect, as the average of this blend ends up being less than 3 years – not exactly long term.
One sovereign fund uses a 30-year rolling benchmark as the basis for a part of the remuneration of its most senior executives. This, too, has its drawbacks, as once a 30-year trend starts to move, it can take a decade to change its trajectory.
Another ties a proportion of all staff bonuses to behavior – how they do what they do and whether they live and breathe the values of a long-term investor. This is a great idea, for the simple reason that behavior drives results. So why not drive the right behavior?
In my opinion, the best solution is a blend – of overall fund performance, individual performance, team performance, and behavior.
Another pre-requisite for success at any organization is strategic clarity – and this is particularly true for long-term investors. Without clarity, your people can be rowing in any and every direction – often against one another. Organizations need clarity of what they’re trying to achieve, why, and how. A clear strategy document helps, but remember that no strategy is perfect and no strategy should be uniformly applied – there will always be exceptions that prove the rule. It is also important to acknowledge the grey areas.
We all know our world is changing at an unprecedented rate and that the mega trends of artificial intelligence, life expectancy, urbanization, and environmental change will affect us all. Long-term investors should ask themselves how their organizations capture and analyze long-term trends – and more importantly, how these insights manifest in their investment strategies.
Long-term investors should invest in sustainable companies – companies that are likely to be around for the long term. Whether a company is sustainable is based partially on standard measures like market share and profitability, but it’s also an assessment of culture. Does the company embrace change? How does the leadership avoid complacency? Is their risk management and governance appropriate? How does the company treat its employees? Its partners? Its suppliers? The societies in which it operates? Does it pay taxes or does it dodge taxes? And, yes, is it environmentally sound?
I would encourage long-term investors to get engaged with the companies they invest in, and to speak out against short-termism. The truly long-term companies will be brave enough to be counter-cyclical. If a leadership team believes in its business model and strategy, the best time to invest in people development, research and development, advertising, and market-share building activities is during a downturn.
The same is true for long-term investors. If you are clear about your investment principles and genuinely believe in your investment strategy, a downturn is the best time to invest.
Don’t switch asset managers due to short-term underperformance, either. Why not judge active managers on the same factors that make up long-termism: attitude, culture, leadership, the clarity of their firm’s investment strategy, how they remunerate their investment professionals, how engaged they are with the industries and companies in which they invest, how they take advantage of long-term trends, their own financial sustainability – and whether their interests are aligned with yours.
After all, asset owners and asset managers alike want to partner with genuine long-term investors.
Campbell Macpherson is a strategic change adviser to sovereign wealth funds and institutional investors and is the author of the 2018 Business Book of the Year, ‘The Change Catalyst.’