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INVESTING/PORTFOLIO STRATEGIES

Tough changes lie ahead for long-termism adoption

Deb Clarke
Deb Clarke said it is ‘critical’ to engage with managers on aligning a fee structure that works in tandem with a long-term investing approach.

While some money managers and their institutional investor clients are already thinking, or are at least prepared to think, in a longer-term way, major barriers to long-termism by money managers remain — particularly when it comes to investment processes.

One is competition. Jonathan L. Doolan, New York-based principal at Casey Quirk, a practice of Deloitte Consulting LLP, said some managers may be producing short-term metrics for performance simply because competitors are providing the data.

That is driven by a “fear of passive, fear of losing assets in a hyper-competitive market. Managers are willing to show clients what they want, (even though it is) not necessarily in the best interests of them as a firm, nor in clients' best interests,” Mr. Doolan said.

The proliferation of new strategies in the low-return environment also has challenged a long-term approach. The multiasset class, for example, “has really emerged and grown the last five or six years,” rendering an objective look at a five- or seven-year track record “impossible,” said Mr. Doolan.

It may be difficult to change that mindset and the practice of investing in a shorter-term way, consultants said.

“For several years, Mercer has been advocating clients and asset managers should take a longer-term horizon,” said Deb Clarke, Chicago-based global head of investment research at Mercer Investment Consulting. “It is becoming very acute as we think about Mercer's role … but there are factors such as benchmarking and regulation, the latter somewhat ironically, which have created a quarterly cycle of reviewing performance. But I do sense that is changing.”

Ms. Clarke said the consultant has had increasing engagement the last three or four years with managers to try to create a long-term framework for investing, but “only a handful have historically been genuinely long term in their thinking. We want to work with asset managers and asset owners to understand what the attributes of a long-term investor are and how we can help evolve that approach more widely and create an environment of genuine long-term wealth creation.”

She added: “You could take a cynical view that it has been a very challenging time for active managers, so perhaps it suits some of them to now think about taking a long-term approach (rather than) short-term decision-making. We would challenge any rebranding into being a long-term investor — what has changed to justify the statement? What is it in their investment philosophy that makes them take a long-term investment approach?”

Another issue is how investment professionals are being rewarded and compensated for their long-term performance, and whether portfolio managers are aligned in terms of bonuses, particularly when it comes to the time horizon over which they are measured.

“I think that is critical, and we certainly engage with managers on how fees could be structured differently to reflect a long-term perspective,” said Ms. Clarke.

Another challenge is the continued short-term thinking and demands of institutional clients on their money managers, asking for frequent updates on manager performance.

“It is interesting to highlight that asset owners have been driving a more long-term time horizon. However, they themselves have really been pressured by boards to ask what has X portfolio manager done for me lately,” with new chief investment officers at plan sponsors often feeling pressure to validate their value, added Mr. Doolan.

This article originally appeared in the May 29, 2017 print issue as, "Tough changes lie ahead for long-termism adoption".