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The Next Decade Belongs to the Long-Term Investor

Global Equities

BNP Paribas Asset Management
 

Executive Summary

  • We live in a world dominated by social immediacy. Being online most of the time makes us
    impatient. As a society, we overvalue immediate rewards and forget the long-term perspective. This leads to a “sandbag” approach to generational challenges, where quick fixes are preferred over long-term viable solutions.
  • This short termism is a problem as it undermines future economic growth as the lack of long-term investments leads to slower GDP, higher unemployment and lower investment returns.
  • In equity markets, stock-picking driven by fundamental analysis accounts for only 10% of the overall market turnover and the average holding period has fallen over the past decades from a peak of 7.5 years to an average of 6 months. Looking at sell-side research analysts, they – guided by their perceived client needs – focus on periods measured in quarters rather than years with less focus and knowledge on the 5-10-year perspective.
  • At a corporate level, the rise in short termism is reflected in a decline in the average tenure of a CEO. Several studies have shown that the average tenure of a CEO in major US companies has fallen from around 6-7 years a decade ago to approximately 5 years today. Management teams are under external pressure to perform in the short term, thereby prioritizing short-term capital returns, the company’s share price and making quarterly earnings forecasts rather than important longer-term strategic goals. This eventually leads to lower long-term value creation.
  • Analysis shows that the biggest factor associated with lower long-term value creation is over­distribution of capital. We encourage companies to return capital to shareholders and companies must pay high attention to their cost of capital, although not at the expense of future growth.
  • History shows that over the longer term, there are very few companies that can sustain and create attractive returns. Studies by McKinsey show that companies with a truly long-term culture and strategic thinking outperformed other companies by 36% in terms of earnings over a 15-year period. Furthermore, from a societal perspective, if all companies demonstrated long-term thinking, they could create an additional 1 million jobs per annum in the US alone.
  • Looking at time horizons from the perspective of asset owners, it is a paradox that the average length of liabilities of sovereign wealth funds is approx. 50 years, endowment, insurance and pension funds from 20 years plus, while investment managers often are being evaluated on a one-year result.
  • However, the good news is that short termism creates opportunities for active managers, and we try to exploit this. We believe in the old adage “time in the market vs market timing”. It is a much more predictive strategy to generate alpha by moving out the time curve than engaging in short-term trading strategies. On a day-to-day basis, the return differential between the good and bad ­companies are more or less zero, whereas on a 10-year time horizon the spread is massive. This creates the ­opportunity for skilled stock-pickers. At C Worldwide, our secret sauce is seeking to understand the ­earnings power of a company five years out or longer and to try to evaluate the sustainability of its ­business model. Understanding what is essential long-term information and what is short-term noise.

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