Asset owners are finding it harder to conduct long-term investing due to a combination of stricter capital requirements, media obsession over quarterly pension fund performance and asset managers focused on high fees and short-term results.
That was the conclusion of investment professionals – among them the chief investment officer of Japan's $1.2 trillion Government Pension Investment Fund (GPIF) – at the 10th annual PRI in Person conference in Singapore yesterday, an event organised by the United Nations Principles for Responsible Investment.
Amanda McCluskey, an investment analyst focused on sustainability at Australian fund house First State Stewart, said short-termist investing by fund managers was becoming worrying.
“It’s a huge problem, particularly for equities,” she told the 600-strong audience at the Marina Bay Sands conference centre. “Back in 1940 the average holding period of a stock by a pension company was seven years… now it’s six months.”
Citing a 2010 survey by investment consultancy Mercer of 900 active long-term asset managers, McCluskey said two-thirds of them had turnover significantly higher than it should have been, some by 150% to 200%.
“In 2014, 46% of 237 active managers were found to be nothing more than closet benchmark huggers,” she added. This has led them to lose trust both among the companies they invest in and their clients, she noted.
Large asset owners that should be long-term-focused are also facing short-term pressures, particularly if they are state-owned.
Hiromichi Mizuno, CIO of GPIF, remarked that the institution had suffered a $50 billion investment loss in the second quarter of 2016, sparking a shocked silence. “Nobody laughed, so I will,” he added. “Volatility should be part of our daily business, but every time we report a quarterly result, there is a very large public event [surrounding it]."
Mizuno noted this was a problem for all public asset owners: “Their media relationship is a big headache.
“On the one hand we deal with short-termism; at the same time we note to asset managers not to fall into short-termism and we tell companies not to fall into short-termism.”
Paul Smith, chief executive of the CFA Institute, argued that much of the issue was down to a general lack of financial literacy across society.
“No matter how well Hiro [Mizuno] does in the long-term, his beneficiaries are looking at quarter-to-quarter performance, so if AUM drops by $50 billion, he has career risk and other challenges coming at him,” he noted.
“Our industry has boiled down to a series of quarter-by-quarter challenges,” added Smith. “We are faced with trying to educate a public in general and pension fund trustees who are extremely poorly educated [in financial investing terms].”
Angelien Kemna, chief finance and risk officer for Dutch pension fund manager APG, said a skew towards shorter-term investing had been exacerbated by the Solvency 2 capital framework in Europe, which force insurance companies to hold more capital for assets deemed riskier, such as illiquid investments.
These rules have thus forced insurers to become shorter-term investors, she said. “And that is bad for the real economy. Solvency 2 punishes them for investing into real estate or infrastructure.”