Short-termism and the responsibility of the future

By

17/10/2016

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What duty do we owe to future generations? It’s a fundamental question that human beings have grappled with for thousands of years. North American indigenous peoples believed that the fates of humans and the earth were intertwined, and that whatever man did to “the web of life,” he did to himself. In ancient Greece, parents secured financial loans with a commitment to intergenerational debt bondage, directly risking the freedom of their children. Today, intergenerational responsibilities are often discussed in relation to environmental and financial matters. In Australia, the prime minister recently attempted to frame debt reduction as a moral duty to future cohorts.

This year’s PortfolioConstruction Forum Conference brought together investment thinkers from around the world to explore a central theme: “The long and short of it.” While investing is supposed to be about the incremental replacement of human capital with financial capital over the long term, today’s fast-paced environment and our behavioural biases often conspire against the theory. Given the apparent pervasiveness of short-term thinking within financial markets and society more broadly, the conference asked: is the concept of long-term investing increasingly irrelevant?

One of the key discussion points running through the two-day program was the environmental, social and governance (ESG) issue of intergenerational equity – the notion that people have a duty to consider the long-term consequences of their actions, and adjust their behaviours accordingly.

Andrew Kuper, the founder and CEO of LeapFrog Investments, tackled the subject head-on with an assessment of the rapidly-growing field of impact investing, while University of Technology Sydney professor Jack Gray argued that the financial sector risks leaving a poor legacy. Geoff Warren of the Centre for International Finance and Regulation (CIFR) and Sunsuper’s Ian Patrick examined the benefits and pitfalls of long-term investment strategies.

 

Increasingly embracing social goals

According to Kuper, investors may achieve superior risk-adjusted returns by backing companies meeting the financial and healthcare needs of emerging market consumers. More broadly, he proposed a focus on “purpose-driven” enterprises with positive social – as well as money-making – objectives. Such companies are typically customer-led and strongly aligned, Kuper explained, ensuring all aspects of the business are geared towards achieving medium- to long-term success. To illustrate how changing attitudes are affecting corporate behaviour, he noted that firms are increasingly embracing social goals, in order to attract graduates from the world’s leading business schools.

Patrick and Warren focused on the practicalities of implementing a long-term investment approach – a pertinent topic for superannuation funds, given their responsibility for meeting the often distant financial needs of individuals. Patrick used Sunsuper’s recent acquisition of a one-third equity stake in the Sydney-based Australian Technology Park as a case study in long-term decision-making. While ATP is pre-let to the Commonwealth Bank on a 15-year term, the new owners are already planning to convert the site from a campus style to multi-tenant use, when the bank decides to move on.

Warren, who conducted a substantial review into long-term investing with the Future Fund, outlined the advantages for investors with the “latitude and attitude” to implement a long-term approach – in particular, the ability to exploit the market extremes and risk premia created by short-term investors. However, he also gave insight into three challenges commonly faced by long-term investors: extracting valuable information from the barrage of short-term market noise, dealing with the uncertainty inherent in longer timeframes, and mitigating frictions between agents and principals.

 

Pressures throughout industry

In relation to agency problems, Warren explored the tensions caused by short-term relative performance monitoring within complex investment chains. Such pressures are evident throughout the industry, he argued – in asset manager bonus structures, fund flows and in herd behaviours. To encourage longer-term evaluations, Warren called for more constructive engagement between agents and principals, including greater discussion of progression towards long-term goals. In addition, he proposed that asset managers should be more explicitly rewarded for appropriate behaviours – a principle already adopted by the Future Fund, which awards 30 per cent of its bonus pool, in accordance with a subjective assessment of staff contributions, to the organisation’s long-term objectives.

As Kuper, Patrick and Warren showed, allowing asset managers to take a truly long-term approach brings many social benefits – from encouraging investment in companies serving emerging consumers, to enabling superannuation schemes to meet the retirement needs of Australians. Short-term pressures, however, threaten to distract us from longer-term responsibilities, including our duty to pass down a world in which future generations may flourish. How successfully we manage these tensions will have huge implications – not only for the investment community, but for society more broadly.

 

Graham Rich is Managing Partner and Dean of PortfolioConstruction Forum. Portfolioconstruction.com.au