Most people would expect pension fund managers to take a long-term view of the investments they manage but, as Prince Charles recently pointed out, that isn’t always the case.
In a short video to the National Association of Pension Funds, the Prince outlined why pension fund managers arguably have a duty to “identify and manage” a variety of sustainability risks. Sustainability risk is a broad term, but to me it means anything which will have a large negative impact on the ability of a portfolio to sustain acceptable levels of growth over the very long-term (think decades, rather than years).
In the Prince’s opinion, the pension fund industry is simply not doing enough to reduce these risks through their investment decisions, leaving potentially avoidable long-term risks for pension fund beneficiaries.
There are two major problems which, to a large extent, drive this lack of holistic thinking about long-term outcomes.
The rise of quarterly capitalism
The trend towards shorter time horizons for investors has been going on for at least a century. While it cannot go on forever, it has already gone on long enough to materially impact investor returns as well as the health of the economy (short-term thinking on the part of owners/shareholders and managers was a major factor in the recent credit boom and bust).
Many years ago investors would typically own a share of a business for five or ten years, which was more than long enough to see what financial progress (if any) the company had actually made.
Today things are different. Most investors are likely to own (or “hold”) shares for five to ten months rather than five to ten years. In such a short time the company is unlikely to change to any meaningful degree, and share prices are driven instead by investor’s reactions to meaningless news stories rather than financial realities.
That’s why most market participants today are not investors at all, they are simply momentum traders, looking to buy what’s going up and sell what’s going down. The company, its products and long-term prospects are often of little interest.
If shareholders are only interested in the next few months then the board and management of a company will tend to focus on that too.
After all, what’s the point of positioning a company for the next decade when your investors are only interested in your next set of…
