Focusing Capital on the Long Term, a non-profit group of investors and asset managers, has for the first time measured the gap between how long an allocator intends to hold on to an investment compared with how long the money remains committed.
In a report published Monday, FCLTGlobal, as the group is called, said it finally has a hard answer to the question of how much capital is being focused on the long term. The study, called FLCTCompass, follows the money from investors to public and private asset classes, all the way through to the companies that deploy the capital.
“The data show us, unsurprisingly, that there is a significant intention-allocation gap of upward of eight years between the expected investment horizon of the saver and the actual time frame that capital remains committed to a particular investment opportunity,” wrote the report’s authors. The organization evaluated data over a ten-year period ending in 2018.
“Savers have a time frame of 12 years, but they invest in assets with a life of four years,” FCLTGlobal CEO Sarah Williamson told Institutional Investor in an interview. “There’s a big difference between what savers are intending to do and the assets. The asset management community is out of sync with the companies they are investing in and the clients they’re investing for.”
Conversely, companies themselves have a mismatch between their short-term funding sources and their own longer-term goals.
“These long-term aspirations, therefore, are lost in translation due to a barbell effect whereby the goals of both savers and companies are weighed down by the path capital takes between them,” according to the report.
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Williamson pointed to the growing dominance of companies with so-called capital-light business models. The assets of technology companies, for example, are primarily in intangible assets, such as software.
“We’re not building trains,” she said. “There’s been a shift to intellectual property.”
The increase in the proportion of companies with a business model less dependent on things like heavy machinery and factories has caused a corresponding decline in the time that investors hold an investment. FCLTGlobal reported that the intangibles trend has contributed to a 14 percent decline in the holding period.
That's because a company doesn’t get as many years of life out of its assets as it once did. Factories have a longer life than a search engine in the fast-changing tech world.
In a short-term world, the average tenure of a CEO has also declined. FCLTGlobal stressed, however, that it’s not clear whether the shorter job tenure of a CEO is a symptom or a cause of the broader decline in investment time horizons.
Other forces affecting the average holding period are harder to forecast. For one, Chinese investors have tripled their savings in ten years, becoming a major influence on markets. Chinese investors also have among the shortest time frames in the world, according to the report.
That has pushed the global average holding period even lower. The future asset allocations and behavior of Chinese investors will affect the entire discussion of long-term corporate behavior, but FCLTGlobal pointed out in the report that it's hard to predict what will happen.
Williamson said the group is researching solutions, including incentives, engagement between companies and investors, and the lifecycle of company research and development. FCLTGlobal is currently working on a report on executive compensation.
Fees, for example, could be restructured to encourage different behavior, she said.
“We’ve proposed a lot of things, including a longevity discount.” Williamson said. Asset managers generally offer fee discounts based on scale. “But you can also lower the price over time. That’s a win-win. For asset managers, it’s cheaper to keep a client than get a new one, and it could lead to more alignment.”
Other ideas include simply flipping the order of financial numbers in reports, highlighting longer-term numbers before quarterly numbers. “You can start with the numbers that matter,” said FCLTGlobal's CEO. “We anchor on the numbers we see — we know that.”