Focus Group: Is patience a virtue?

November 2014 (Magazine) | By Dominic Gane

Over three-quarters of respondents polled for this month’s Focus Group consider their fund to be a long-term investor.

But the devil is in the detail. For one UK fund, long-term investing means “engaging with the companies in which we invest to ensure that they are taking decisions that protect their long-term earnings potential”. Many relate their investment horizon to the duration of their liabilities, which may or may not have a long horizon. One contrasts a long-term “strategic orientation” with the variety of time horizons taken across asset classes. 

For three respondents, it depends on what is meant by ‘long term’. “If long term in your sense means more ‘illiquid’, then we’d disagree,” said a UK corporate fund. “We prefer liquid investments which generate income and income growth and liquid markets which offer us the opportunity to recycle capital by realising intrinsic (fair) values and reinvesting opportunistically.”

When asked to pin down their assumptions, a quarter defined long-term investing in public markets as taking a three to five-year view. A third saw it as a seven to 10-year view. Only six were prepared to take a “generational view” of 15 years or more. “A decade is a period of time we consider as suitable to define long term,” said an Austrian fund. “On one hand, not many investments have a longer lifetime and, on the other, it matches with the liabilities based on our business model.”

Fifteen respondents think the best advantage of long-term investing is that it makes for a better match between assets and liabilities, while 14 think it is more likely to outperform, net of costs. Three respondents think it has no advantage.

Ten respondents said that they face no difficulties investing with a long-term view. For the rest, regulation is considered the main difficulty. A UK local government fund was candid: “Our investment regulations are 20 years out of date. We have been promised a full re-write for five years-plus, but the Department for Communities and Local Government (CLG) has just tinkered. Rather than waste time with consultations on active versus passive, CLG should address this.” 

The willingness of the asset management industry to meet the needs of long-term investors was also cited as a problem. Sixteen funds have no problem finding public-market asset managers that are willing and able to invest for them long-term. A further seven find it more difficult, with a Swedish fund highlighting that the “incentives of managers are not always the same as ours”. One UK local authority fund said: “Active managers seem to think that their title means that they have to trade.”

Nine can only find managers for certain classes or strategies. A UK fund contrasted long-term investments in illiquid private markets with public markets that are “driven by short-term liquidity and mark-to-market ideology, which is anathema to long-term investing, which is about long-term sustainable cash flows”.

Three-quarters of those polled feel their fund has genuine transparency into all the fees, charges and expenses it incurs through active portfolio management. Eight funds feel the opposite; a UK fund said “fund of funds arrangements are particularly opaque”. A Danish fund added: “We have spent a lot of time getting insight, and have to a large degree. However, some costs are not very transparent – like indirect transaction cost.”

Over half of respondents see value in having a variety of investment strategies with different time horizons in their fund’s portfolio. “Multiple strategies – alpha and beta, internal/external, short term/longer term – should give better results,” said a Danish fund. A UK fund added: “If you are pursuing unconstrained equity risk-seeking alpha from manager skill, then you need to have a range of styles or investment strategies which would include highly concentrated low turnover portfolios and larger momentum-driven high turnover managers.