As part of my multi-disciplinary Master’s degree, I did one unit in the Business School about business strategy. There I sat in a lecture room full of keen-eyed, shiny business students and me, the curious arts student whose entire career has been in the private sector, a large chunk working in investment.
As with many clichés that were trotted out during that course, the one that just made my heart sink due to its sheer lack of critical thinking, was the old chestnut “if you pay peanuts, you get monkeys”. I countered that actually, sometimes if your incentive packages have large sums of money tied to short-term performance at its centre, you create the perfect environment for monkeying around. Sub-prime mortgages and the GFC anyone?
So imagine my reaction when I read last month that some of the gorillas of the investment world were holding secret summit meetings to “encourage longer-term investment and reduce friction with shareholders”. The Financial Times’ supplement FTfm reported that meetings were held with Warren Buffet, the chief executive of JPMorgan Chase Jamie Dimon and the heads of heavyweight investment houses Fidelity, Vanguard, BlackRock and Capital Group.
The investment industry were obviously concerned that they were not aligned with the requirements of listed companies looking to grow their business; or their actual end-customers, you and me, who invest for long-term wealth development. At the top of the companies’ complaint list was the institutional shareholders focus on short-term returns, compared to long-term growth goals of companies.
The problem is that the investment industry markets its short-term performance to get more of the real capital owners, you and me, in the door and boost their funds under management. It then also creates incentives for its investment staff based on their short-term performance. They are not all like that, the best active fund managers do take long-term views and engage with companies and their trading volumes tend to be less. But many others churn through trades in passive or shadow-passive funds just trying to replicate an index to make their performance targets, which are very often tied to their performance versus the index. It would be more useful for the investment industry to tie incentives to longer term performance, in line with us, the customers, many of whom are saving over the long-term for retirement.
The Association of Superannuation Funds of Australia estimates there is $AUD2 trillion invested in superannuation, of which $AU317 billion is invested in Australian equities with a further $AU183 in Australian fixed interest. Australia is the fourth largest superannuation market in the world, behind the United States, Japan and the United Kingdom.
The United States had an estimated $US23.5 trillion in retirement savings as at 30 September 2015, according to the Investment Company Institute inside a variety of retirement savings vehicles. This does not include other investment savings, just the money in vehicles designed for long-term investing. According to Goldman Sachs, 69% of the US stock market is owned by US households, mutual funds and government and pension funds. The remaining 31% is made up of predominantly international investors (16%) with the much-talked-about hedge funds holding only 4%.
The British Investment Association stated that 38% of the £5.5 trillion of funds under management are British pension funds in 2013. According to Towers Watson, the Japanese pensions funds had $US2.8 trillion under management.
That is a lot of people looking for long-term investments to give them financial security at retirement. Surely the stewards of their money should align their activities with their end-customers.