LONG-termism is good for you. Investors and corporate executives are far too focused on the short term, with results that in the long run are bad for more or less everybody.
Few would disagree with these statements. Long-termism is up there with motherhood and apple pie among issues that everybody favours.
But then the scepticism starts. Are there any ways long-term thinking can actually make us money within a timeframe short enough to do us any good? If looking to the long-term requires taking a short-term hit that endangers a money manager’s career — and it often does — then capitalism’s model for allocating capital has become flawed.
But the convening power behind the Focusing Capital on the Long Term initiative (BlackRock, McKinsey and the Canada Public Pension and Investment Board) could at least, this week, bring more than 100 powerful asset owners, from public pension plans and sovereign wealth funds, together in Manhattan for a ‘Long-Term Value Summit’.
Big asset owners do not, in practice, seem at all cynical about attempts to boost long-termism. Perhaps the most encouraging aspect of the event was a clarity that there is a problem, and that much of the problem has to do with skewed incentives in the investment industry itself.
What was most depressing, however, was a deepening alarm that the era of low interest rates, and re-regulation in the wake of the 2008 financial crisis, has skewed incentives even further towards the short term.
Exhibit (a) is infrastructure. Governments are desperate for the private sector to invest in it. It is a natural investment class for public pensions plans and sovereign wealth funds, requiring patient long-term capital.
What was most depressing was a deepening alarm that the era of low interest rates, and re-regulation in the wake of the 2008 financial crisis, has skewed incentives even further towards the short term
Michael Sabia, chief executive of Caisse des Depots et Placements de Quebec, listed the advantages succinctly. Interest rates are low, and are likely to stay low for decades. “As a result we need to seek incremental returns elsewhere. How do you replace those returns? Infrastructure is a natural and very appealing place to look.” This is because it is long term, carries a low risk of capital loss, is stable, and generates a lot of cash. As he puts it, infrastructure projects “have many of the characteristics of a fixed income portfolio, but they offer incremental return”.
So why the concerns about infrastructure? First, it is not just the big long-term institutions that have received this message. Everyone who would normally invest in bonds has sought out infrastructure as a bond substitute over the past six years. The result is valuations have gone too far.
Carsten Stendevad, CEO of the ATP Group, which manages Denmark’s public pensions money, suggests the fund was keen to invest in infrastructure two years ago — but that valuations are now unattractive.
There is a second problem. Investing in infrastructure is usually an act of trust in a government. Will the flows of income be as expected? For example, on a toll road, investors will take the risk that the economy slows, fewer people drive, creating fewer revenues, and the building risk, that completion is delayed. They dislike taking other risks.
Mr Stendevad points to recent incidents, such as the French government’s decision to review the tolls on autoroutes, or Spain’s shifts in solar subsidies, as severely damaging institutions’ confidence in infrastructure as a sector.
Finally, in Europe at least, there is great anger that regulations have unwittingly made it hard, or even impossible, for large long-term funds to invest in infrastructure.
Angelien Kemna, chief finance and risk officer of APG, which oversees public pensions for the Netherlands, said the Solvency II directive for insurers had made insurers shy away from real assets.
“Forcing [pension funds] to set aside assets for collateral purposes in the same manner as a bank or hedge fund does not make sense, and it results in a direct loss of long-term investment opportunity.”
Infrastructure’s appeal is evident. But those new to the sector should heed these warnings. The big asset owners who naturally concentrate on the sector seem deeply concerned. As for politicians and regulators, the message is that they will need to make changes if they want to persuade long-term investors to pay for public infrastructure.
Published in Dawn, Economic & Business March 16th , 2015
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