In the current era of the 24-hour news cycle, focusing on the long term can seem like a novelty. And yet many corporate executives and investors have begun emphasizing the benefits of looking beyond the upcoming quarterly or annual financials.
Mergermarket on behalf of Toppan Merrill spoke with four experts to explore the most important factors influencing long-termism in the current environment.
Toppan Merrill question: Investor dollars are increasingly pouring into passive investment vehicles – despite the emergence of the 24-hour financial news cycle and the proliferation of stock-trading apps. Do you think this move toward passive investing makes it easier for companies to focus on the long-term? Leading industry experts weigh in...
Sarah Williamson, FCLTGlobal says: Not necessarily – passive investments are certainly on the rise, but putting assets in an index fund or an ETF doesn’t make that investment “long-term” by default, and we know that short-term trading in ETFs is rampant. Investors need to be an active and engaged part of a company’s shareholder community whether their expected holding period is five years or five decades. The most vocal investors still tend to be those who concentrate on near-term returns – activists, hedge funds, and the sell-side.
Long-term investors are typically quiet publicly and may even share their perspectives with the company privately, creating an imbalance of pressure to focus on the short-term at the expense of long-term value creation. Our work has pointed us to a number of strategies that we believe asset owners and asset managers can employ to better connect with the companies they invest in. They may wish to prioritize their largest positions, the companies with upcoming issues, the highest- and lowest-performing companies, or simply those in a certain area. Some funds engage only on issues of specific importance to them; others engage deeply with a few companies on the major strategic issues relevant to each.
At the end of the day there’s no one way to manage money, but all investors can engage appropriately with their portfolio companies and ensure the long-term voice is heard. The analogy we like to use is a long road trip – even if there’s a long trip ahead you can’t take your hands off the steering wheel.
Andy Green, Center for American Progress adds: I have not seen clear analytic answers to this question yet, so I think this is still a bit of a speculative landscape. It does seem to be intuitive that greater passive investing means a longer-term approach is more viable, because that cash is not going anywhere in the short term. Some major asset managers make the point that passive index investing requires them to engage with companies more to ensure that companies are performing well over the long term. I find that to be a convincing starting point for the discussion.
At the same time, I do think there is something potentially lost from overreliance on passive investing. Active trading and active capital deployment is the basic principle of capitalism – it's what allows us to hold companies accountable. It's one of the reasons we have disclosure, so that capital markets can make good decisions. I remain reasonably confident that there is enough capital out there in search of opportunities, so I'm less worried about the possibility of too much passive investing. I'm more worried about the concentration of companies across the economy, such that the active investors have no one to choose between. I'm also worried about the insufficiency of disclosure, such that the growing set of investors more concerned about ESG, for instance, don't have enough information to make meaningful trades on.
Timothy Coffin, Breckinridge Capital Advisors weighs in: It's an interesting question. I think that both passive and active strategies have a role in encouraging companies to focus on the long term. I think one example of this is the increasing trend of investors, including passive asset managers, engaging with companies to be focused on sustainability. Some of the most influential passive managers are already actively engaged with the companies they own shares in. Engagement is a tool they can use to provide added value for shareholders.
I would also say that on the active side, investors increasingly want to know what's in their portfolio – in some cases in order to determine whether their investments line up with their values. I think that’s a constructive trend in the market, as it fosters a greater sense of stewardship.