Short-term investment trend is costing plenty

IN a world of instant gratification, short-termism is a growing problem – it manifests in investment behaviour and has grave consequences not only for retirement outcomes, but for capital markets and economic growth.

It is easy to see how we got here. Everyone is facing increasing amounts of information overload – always on, always available and, added to that, it is not always simple to distinguish between credible information and “fake” news.

There is also improved access to investment values and a proliferation of investment choices.

The result is that anyone who has a responsibility to manage an investment portfolio – be that a professional investment manager or an individual saver – is continuously questioning their decisions and being pushed to implement change in response to new information.

The consequences – on which there is unusual consensus from academia and industry – are threefold: savers are missing out on returns, companies are missing out on additive investment opportunities and society is missing out on long-term growth.

This value destruction has now been well researched and documented. In February, the McKinsey Global Institute completed probably the most comprehensive study of the effect of short-termism on company value creation.

Long-term companies in the US grew their revenues cumulatively over 13 years 47% more than their short-term peers. They grew their earnings 36% more and they invested almost 50% more in research and development.

McKinsey went so far as to estimate that the annual value to be unlocked if companies in general took a longer-term view could amount to as much as 0.8% of GDP a year in the US.

With South Africa’s growth now seemingly marooned in the 0% to 1% range, consider what a meaningful effect a longer-term focus could have.

In another study, conducted last year, Hsu et al considered the effect on long-term performance of retail investors taking short-term views.

This simply related to investors trying to time the market and invariably buying high and selling low.

Because they are chasing the next “best performer” or reacting to fear, they end up encashing an investment at the wrong time.

The study was based on US mutual fund flows over a period of 20 years and the result demonstrated that 2% value was destroyed in this way every year.

It may not sound like much, but consider the compounding effect.

Over 20 years, 2% a year increases a portfolio value by almost 40%.

Our analysis of the South African market suggests results would not be dissimilar for local investors.

If you had been an investor in the South African equity markets for the past 15 years and you cashed out of the market for its 10 best days over the period, your investment would be worth 43% less today than if you had stayed invested for the full period.

So in light of all this value destruction, what should investors and capital market participants be doing about it? First, our investment managers need to engage companies on their long-term plans and encourage investment for growth, which will result in better ratings.

In turn, asset owners can encourage long-termism by ensuring their investment managers take a long-term view.

This means they need to be prepared to suffer short-term under-performance in pursuit of better long-term outcomes.

SA’s unit trust industry and those who advise on it need to start thinking beyond one- and three-year performance and encourage a long-term approach to unit trust investment.

–