Financial Crisis Sent Long-Term Investing Spiraling Downward

A recent report by the World Economic Forum shows that ever since the economic crisis, investors have shied away from long-term investing. Today only 25 percent of the world’s professionally managed assets are allocated to long-term investing.


Experts at the World Economic Forum see long-term investing in a downward trend. According to The Future of Long-Term Investing, an analysis prepared by the World Economic Forum in collaboration with Oliver Wyman, long-term institutional asset owners held slightly under half of the world’s professionally managed assets in 2009 — approximately US$ 27 trillion out of US$ 65 trillion. The report indicates that constraints on these investors allow roughly 25 percent of their assets (US$ 6.5 trillion) to be used for long-term investing, with the potential of their allocation decreasing even further.

“The crisis has exposed key constraints that some of these long term investors face when executing long-term investment strategies,” says Max von Bismarck, Director and Head of Investors at the World Economic Forum USA and forum-author of the report.

Before the economic crisis, many funds underestimated their liabilities under stress, such as university endowment funds, that led to a liquidity crisis. Investors lost faith in holding assets for a long time and shy away from long term investing in an effort of derisking their portfolios.

The report states that the ability to make long-term investments in areas such as infrastructure, innovation and the transition to a low-carbon economy is diminishing, leaving behind a massive financial gap. According to von Bismarck, global infrastructure projects need up to $3 trillion per year and green investing requires $500 billion by 2020 to significantly reduce global warming.

Emerging markets these days still represent a major long term investing attraction. According to von Bismarck, 60 percent of all US pension funds to whom his team spoke want to increase their emerging market allocations, which could lead to an overheating. “Given the enormous inflows, some emerging economies have concerns of too much hot money flowing into the country and might use capital controls,” von Bismarck says. “We think it is important to understand how you can still create a channel for long term investments in infrastructure.”

The report points to considerable internal challenges that many institutions face when making long-term investments. As a result, the analysis, based on academic research and the cooperation of around 150 leading industry experts offers recommendations to institutional investors and policy-makers that are intended to stop the downward spiraling trend. Discussion points include the impact of regulatory decisions on long term investment perspectives, the mitigation of capital protectionism and advice to companies to align their long term strategies with compensation incentives and improve communication with stakeholders and staff.


Read the full report: The Future Of Long-Term Investing.