Many investors want to be more long-term oriented — and most should be, at least according to longstanding conventional wisdom. But as we found in a recent survey, there are numerous obstacles to consistently maintaining a long-term focus, with market volatility, manager performance, corporate board pressures, and potential career risk topping the list. After all, short-term bouts of underperformance are all but inevitable when pursuing a long-term investment approach (Figure 1).
With all that in mind, I recently tackled three related questions:
- What exactly does it mean to be a “long-term” investor?
- Are there advantages to being more long-term focused?
- How can you identify a truly long-term-oriented asset manager?
1. What exactly does it mean to be a “long-term” investor?
We asked around 250 asset owners for their definition of “long-term” investing. Given their often widely differing starting points, investment objectives, policy and governance constraints, and investment objectives, the answers varied greatly. Roughly 45% said “five to 10 years,” just under 45% said “over 10 years,” and about 10% said “three to five years.”
Ultimately, though, I think being a long-term investor is less about a specific time frame and more about making intelligent decisions. Investment success can happen across a range of time horizons. For example, many hedge funds trade very actively and still achieve attractive results. But institutional asset owners generally can’t run their portfolios like hedge funds. For these organizations, there is real “alpha” opportunity in creating structures and practices that allow for sound investment decisions through a long-term lens, while helping to not succumb to short-term considerations.
2. Are there advantages to being more long-term focused?
In short, yes. In their research paper “The search for a long-term premium,” Tim Hodgson, Liang Yin, and Jeremy Spira of the Thinking Ahead Institute looked at a range of academic studies in an effort to gauge the benefits of long-term investing. Some of their findings support the idea of not being overly short-term focused with your decisions, while others speak directly to the benefits of being more deliberately long term. Here are some of their key conclusions:
- Resisting the temptation to “chase” short-term performance can avoid a 1% annual drag on investment returns.
- Not selling assets “under pressure,” whether from boards or others, can avert a 1.5% annual drag on returns.
- Reducing overall portfolio turnover could add 26 basis points per year to returns.
- Active ownership (engagement) can magnify annual returns by as much as 2.3%.
- Capturing systematic mispricings can boost yearly returns versus an index by 1.5%.
- Illiquidity premia could be worth an additional 0.5% − 2% each year.
3. How can you identify a truly long-term-oriented asset manager?
Here are some questions I’ve developed that, if answered properly, may go a long way toward helping asset owners determine if an investment manager is really long-term oriented in their mindset and approach:
- Does the team have a clear, robust investment philosophy that it has largely stuck with over time?
- Does the investment process and time allocation focus mainly on the drivers of long-term success?
- Is the team’s investment time horizon (as measured via portfolio turnover) aligned with its process?
- Is the team’s compensation structure based, at least in part, on long-term performance results?
- Does the team monitor its portfolio holdings to ensure that the investment theses remain intact?
- Does the team communicate candidly and effectively with its clients on an ongoing basis?
- Are the firm’s culture and decision making conducive to long-term client outcomes?
Want to go deeper?
To learn more, please read my full white paper on this topic, Investing for the long term (in a short-term world).