In early 2017, eight Thinking Ahead Institute members (three asset owners, four asset managers and one asset consultant) decided to come together and form a research working group. It was driven by a shared belief that the issue of short-termism in our industry requires addressing. All together we had more than 230 years of industry experience. We thought we could turn that experience into a practical framework for implementing long-horizon investing.
Now 12 months later, what have we delivered?
In short, five research papers and one toolkit.
We felt that it was natural to start with the question whether long-horizon investing is even worth undertaking. Because if we cannot be at least reasonably certain that we will be rewarded, then why bother? That led to the production of our first research paper “The search for a long-term premium”. This paper is, to the best of our knowledge, the first attempt to quantify value creation via long-horizon investing in incremental investment returns.
In the paper we propose eight building blocks – investment strategies and behaviours that are only compatible with a long-horizon investing approach. Together, they provide evidence of a sizeable net long-term premium of 0.5% to 1.5% pa depending on investors’ size and governance arrangements.
Having addressed the question of “why”, the next question we asked ourselves was: where should investors start on this journey?
We settled on a set of strong long-horizon beliefs, shared across the entire organisation and applied in decision making at all levels. Our second paper “Converting the 99: long-horizon investing beliefs” discusses the process of building strong beliefs. It also proposes nine core long-horizon beliefs for investors to consider and adapt.
Having strong beliefs is, of course, just the first step. “What you think, you become: a practical guide for asset owners to build a long-horizon mindset” addresses many more aspects that asset owners can work on (eg decision-making process; measurement; alignment; risk management and culture) to think, and consequently behave, like a long-horizon investor. The paper lists 42 concrete steps asset owners can take to develop a long-horizon mindset and set themselves on a path to harvesting the long-term premium.
In the long-term premium paper, factor investing was identified as one of the building blocks. Amundi Asset Management, a member of the long-horizon investing working group, have been working closely with the Thinking Ahead Group over the last few months to provide some practical guidance on implementing this specific long-horizon strategy. The paper “Investing in equity factors for the long run” proposes a four-step process for long-horizon asset owners to develop a factor-based approach.
While long-horizon investors can / should be active and adaptive when circumstances change, there is no doubt that patience has immense value for them. It supports the ability to invest for the long term, and allows the maintenance of a (currently) losing position. Left unmanaged, patience will erode and lose its value – it must be seen as a depreciating asset. “Patience: not merely a virtue, but an asset”, a co-authored paper by my colleague Tim Hodgson, Dr Geoff Warren from Australian National University, and myself, recognises the importance of patience. Furthermore, it puts forward a number of ways of building and maintaining patience in a principal-agent environment.
Together, these five research papers offer a long list of ideas – almost intimidatingly long. So how should an asset owner implement them? They will need to consider their unique context and constraints before they can develop a tailored implementation plan and change programme. We have built a gap-analysis toolkit to help measure an investors’ true time horizon and identify what needs to be improved. We encourage investors to undertake this exercise to start their individual journey of bridging the gap between an attractive concept and desirable outcome of long-horizon investing.
So that was a not-so-brief looking back. It would be hubristic for us to claim that research is now “done” for this area so let me offer a looking forward. I see at least three areas that require further in-depth research:
So far our papers are largely about providing guidance to help asset owners address the governance challenge of long-horizon investing: how to stay patient and on course? how to build strong beliefs? how to align interest? On the other hand, asset owners can certainly also benefit from a guide to building long-horizon skillsets to identify long-term attractive investment opportunities in the first place
I am often given feedback that is along the line of “this is great but we can’t really afford to be a long-horizon investor because of our constraints”. While it is convenient for us to talk about long-horizon versus short-horizon investors in our papers, we fully recognise that in reality the practice of almost all investors has both elements. My belief is that all investors can benefit from moving towards a (sensible) longer time horizon, regardless of their constraints. For example, they can benefit from simply stopping doing value-destructive short-horizon activities. A further investigation and understanding of practical constraints that prevent investors from adopting long-horizon investing practice is, to me, a fruitful area for research
When it comes to measurement there is a dilemma in our industry. We measure what is easy to measure (eg past returns). And we don’t really measure what matters (eg state of culture; strength of governance). We should fundamentally change our focus of measurement. There is a need to develop a more holistic measurement framework – potentially a balanced score approach – to support long-horizon investors. I would also like to see progress towards long-termism, for us as an industry, measured appropriately and monitored.
Long-horizon investing is hard in practice. As Keynes said “There is a peculiar zest in making money quickly”. That is probably why it is so rewarding, and will continue to be rewarding. I hope our research is useful when you embark on this journey towards a better long-horizon investment approach.