Thu, Nov 26, 2015
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

WEF report says long-term investing can be severely distorted by inaccurate, short-term focus

Monday, April 02, 2012
Opalesque Industry Update – Inaccurate measurement of investment values, returns, risks and liabilities can create substantial distortions to long-term investment strategies and drive long-term investors to adopt a short-term orientation, according to the Measurement, Governance and Long-term Investing report, released by the World Economic Forum.

Since long-term capital can play an important role in helping to drive economic growth, stabilize financial markets, and provide financial returns to fund pensions, education and other social goods, the report focuses on the often overlooked, yet increasing number of measurement-related challenges that can hinder long-term investing. Among such challenges:

Mark-to-market rules require long-term illiquid portfolios to be evaluated relative to a public market benchmark, however, short-term variations in the value of assets held for the long term can lead to shifts in investment policy or execution that hinder success in long-term investing.

Poor risk measurements or an inadequate understanding of risk can lead institutions to hold riskier (or less risky) assets than they should otherwise. Staff evaluation and compensation schemes may create a framework that rewards staff for acting against the stated long-term interests of the institution.

The report argues that without effective governance, measurement schemes can distort decisions regarding the choice of investments and the time frame over which they are held. And the lack of meaningful, intuitive measurements for performance and risk over long-time horizons adds more complexity to long-term investing and the governance of such efforts.

“Long-term patient capital is vital to promote sustainable growth, create jobs and solve problems plaguing the global economy today. Yet, as this important paper highlights, a short-term orientation in terms of performance measurement, leadership, media focus and regulatory constraints threatens to obstruct long-term investment and deprive society of the critical benefits it can provide,” stated Scott Kalb, Chief Investment Officer, Korea Investment Corporation (KIC), and Chair of the World Economic Forum’s Global Agenda Council on Long-term Investing.

The central conclusion and recommendation of this study is that governing bodies and other external stakeholders need to act on the understanding that the performance of long-term investments unfolds over time periods longer than the quarter or the year, even when short-term measurements are used. Such metrics should be placed in context, lest long-term strategies be abruptly and unfortunately revised.

“In this report, we consider the impact of different types of measurements and how, combined with thoughtful governance approaches, institutions can think more carefully about measuring and supporting their long-term strategies,” observed Josh Lerner, Jacob H. Schiff Professor of Investment Banking, Harvard Business School, and the lead researcher for the report.

“Having a long horizon accentuates the importance of governance models, and long-term investors can play a critical role in fostering leading governance practices, both within their own institutions and for the companies that they invest in,” remarked Mark Wiseman, Executive Vice-President, Investments, Canada Pension Plan Investment Board. “For long-term investors, good governance that includes a qualified board with a solid long-term orientation and commitment is integral to ensuring that they are able to stay the course through economic and investment cycles. This report makes the case that without appropriate board oversight on risk assessment, valuation metrics or compensation structures, investors can easily lose sight of long-term gains and focus instead on short-term metrics.”

“Although there are numerous metrics for the short-term assessment of long-term investments, none are without limitations. Good governance therefore is critical to ensure sound decision-making around which investments are chosen and for how long they are held,” said Michael Drexler, Senior Director, Head of Investors Industries, World Economic Forum USA.

The report was developed by the World Economic Forum in collaboration with a research team led by Josh Lerner of Harvard Business School. Guidance was provided by the World Economic Forum’s Global Agenda Council on Long-term Investing.

Press release: Source

More information on the report can be found at: Source


What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Other Voices: Hedge fund marketing and the selling cycle[more]

    By Bruce Frumerman. How long is the selling cycle now? That’s a question my financial communications and sales marketing consulting firm has been asked on a regular basis by hedge fund firm owners and sales people, ever since we opened the doors to our firm in 1987 pre-crash. Wa

  2. People - Solus Alternative Asset Management adds chief strategist from BTIG[more]

    From Daniel Greenhaus joined hedge fund manager Solus Alternative Asset Management as managing director and chief strategist. He will work closely with Chris Bondy, Solus’ chief economist, managing director and executive vice president, said Chris Pucillo, CEO and chief investmen

  3. Opalesque Roundtable: Seeding deal terms can be onerous for hedge funds[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: Executives from fund of funds firms, family offices, a placement agent, a private equity firm, and an accounting firm gathered in Connecticut last month for the

  4. Opalesque Roundtable: Family offices flock to co-investment[more]

    Bailey McCann, Opalesque New York: Co-investments have been a hot topic for pension funds in recent years, as they try to move away from high fees and improve transparency. But now, family offices are more readily getting into the mix and establishing in-house deal teams, according to the delega

  5. More institutional investors invest in CTAs compared to last year despite dissatisfaction with performance[more]

    Benedicte Gravrand, Opalesque Geneva: "Despite a strong start to 2015 for CTAs in Q1, commodity market conditions have made return generation difficult for fund managers over much of the rest of the year to date," says Preqin’s November