Banning morning meetings could be the circuit breaker that gets investors to snap out of their short-term mindsets, which leads many market participants to act more like traders than the advocates of patient capital they claim to be.
You know who you are.
And as radical as it sounds, it is one of several practical and plain-spoken ideas presented by investing experts with professional fund managers in mind.
“If you ask most people if they’re a long-term investor, they’ll tell you they are,” says Geoff Warren, an associate professor at Australian National University, and member of the Brandes Institute Advisory Board. He has co-authored research on long-term investing with David Iverson, head of asset allocation at New Zealand Superannuation Fund, NZ’s equivalent of the Future Fund, and also linked to Brandes.
“The problem I think is the industry tends to be configured around delivering short-term performance. The culture by and large of the investment industry is directed in that way,” Professor Warren says, and “sticking with something for the long term is very hard to do”.
Poor performance or underperformance can invite questions fund managers find most unwelcome, even more so when they are staying true to their stylistic roots and resisting the urge to sneak in some momentum-derived alpha on the side.
With the aim of slowing down “the decision cycle”, Professor Warren suggests “removing the ability to act quickly may actually aid contrarian or value-based investing”. On that basis “do nothing” is a credible option. This works at both ends of the cycle; it can mean waiting for the rot to shake out (March 2009, take me back) or resisting taking profits when things look really stretched (which is probably exactly where we are now).
Sensibly, the research also says avoid investment fads and link long-term strategies to capabilities. This is the stay-in-your-lane rule, and assume it speaks to global equities strategies, which punt currency, just as much as quality-oriented strategies, which are buying up software as a service concept stocks.
Then there is the framing of information, which tends to emphasise historical performance and not progress toward a defined objective.
This is especially relevant in the context of reporting superannuation returns, which in Australia are centred around balances or alternatively, one-year performance league tables. Super in the drawdown phase is not collected as a windfall balance, but tapped as income. And yet it is almost never spoken about that way, either in accumulation or drawdown.
In one example they chart the performance of a hypothetical $100,000 investment in a portfolio mirroring the Datastream World Equity Index in 1990 versus a $750,000 target for retirement in 2025. As they say, the tech wreck and GFC “appear as blips along a satisfying trajectory” and the eye is drawn to the cumulative progress.
But if you charted that same index (again, the Datastream World Equity Index in US dollar terms) showing the annual return plotted against a constant target of inflation plus 4 per cent, the portfolio return looks like a crime scene.
And yet the two visual representations are almost the same thing, showing how our lazy shorthand can be a hinderance to clear communication.
Finally, the research draws several important conclusions around culture and rewarding performance. It’s important to have clear principles, and not dual (and potentially conflicting) objectives such as long-term returns and beating the peer group over one to three years.
When it comes to remuneration, bonuses should definitely be earned for annual performance, but introduce conditions around how that award vests. Professor Warren also suggests a subjective element linked to behaviour and how that behaviour builds value over the long term.
With earnings season top of mind, unsurprisingly he urges investors to focus on the big picture. Consider a 40-year-old portfolio manager; they’re now into their 30th results season. That is more information about pallets, paper, milk or jeans than anyone can master.
And to the earlier point about slowing down the decision cycle, we daringly repeat the suggestion of naming a “information perimeter cop” whose job it is to keep perspective and shut down intraday noise.
“People don’t want to think that they’ve missed something,” Professor Warren says. “They feel like they have to have the finger on your pulse all the time.” Constant monitoring and reacting does not always help.