How long-term investors deal with short-term pressures
Asset owners with a long-term time horizon are not immune to short-term pressures, according to a new publication from FCLT Global.
The 30-page publication – ‘Balancing act: managing risk across multiple time horizons’ – addresses the challenge of managing multiple-horizon portfolios such as pension plans, sovereign wealth funds and endowments, by outlining why such management is important.
The report builds on the findings uncovered at FCLT Global’s conference last May, where more than150 business leaders – including Unilever CEO Paul Polman, McKinsey CEO Dominic Barton and BlackRock CEO Larry Fink – discussed how investors can focus more on the long term.
The group issued four practical action points designed to recalibrate public markets toward a longer-term focus. They are:
- Long-term-oriented metrics
- More transparency in capital allocation decisions
- Weighing long-term risks against clients’ and companies’ objectives
- Potential incentives for long-term shareholders.
Ross Parker, communications associate at FCLT Global, tells IR Magazine that the top-line message of FCLT Global’s new report is that short and long-term risks often get muddled or are contradictory.
The report proposes new approaches for investors to think about megatrends like climate change and demographic shifts, and how they affect the success or risk of their fund. It also comes with a range of practical tools investors can use and a risk conversation guide.
‘In the paper we set out different ways [an investor] can measure the risk [of a fund] at the outset while also tracking back and monitoring [the fund’s] performance against a clearly defined purpose statement for the fund or risk-appetite statement,’ Parker explains.
‘This way everybody involved knows what the investor’s appetite for risk is in the short and long term. This way [people aren’t] surprised when they start to see some intermittent drawdown from interim loss even though the investor is on track for its long-term goal.’
Elsewhere in the report, FCLT Global looks at the behavioral tendencies of investors, focusing on how they manage, assess and understand the risk profile of a fund. It concentrates on how these factors are communicated from the managerial level to the trustee level and where things get lost along the way. It also highlights how a better understanding of these issues can be developed in its conversation guide.
Parker states: ‘The guide lays out a list of questions a manager might encounter from his or her board of directors and [tips on] how to answer them in ways that are fact and number-based so the trustees can really understand the appetite for risk over the long term. This way they are not thrown off course along the way.’
Given FCLT Global’s mission to encourage a longer-term focus in business and investment decision-making, Sarah Williamson, chief executive officer, notes that improving multi-horizon risk management is critical to extending investment time frames.
‘It’s an effective method for boards and executives to deliver value to their beneficiaries,’ she concludes.
FCLT Global was created in 2013 by Mark Wiseman, CEO of Canada Pension Plan Investment Board, and Dominic Barton, CEO of McKinsey, who had both observed undue short-term pressure on the investors and CEOs with whom they worked.