By Claire Sawyer, Associate Director of Content Development, CAIA Association
We know life can get busy, and sometimes you just can’t find the time to tune in to every episode of the Capital Decanted podcast. In this blog post, we’ve summarized our latest episode, giving you all the leading insights without the lengthy listen.
Read on to explore the valuable perspectives shared in the podcast!
In the age of TikTok, instant gratification, and ever-shrinking attention spans, it’s no surprise that the relationship between time horizon and investment strategy continues to be a hot topic for investors. We all know, on a logical level, that investing for the long term is in our best interest, yet the follow-through often leaves something to be desired.
So, what gives? Why do so many of us talk the “long-term investor talk” but look something like a newborn giraffe on roller-skates when it’s time to walk the walk?
In the first episode of Capital Decanted Season 2, our hosts are joined by Geoff Rubin, Senior Managing Director at One Fund Strategist at CPP Investments, and Sarah Williamson, CEO of FCLT Global, to explore what it actually means to be a long-term investor, the systems and factors that support or undermine a long-term investment strategy, and why so many of us struggle to realize our (seemingly straightforward) investment aspirations.
Defining long-termism: What it’s not.
The first order of business is defining long termism. Simple enough, right? We thought so too but, quelle surprise, it wasn’t that easy. Definition by exclusion is often a good starting point, so let’s begin there.
Long termism is not just a certain investment period. A time horizon of 10-20 years or more supports and is necessary for a long-term investment strategy but doesn’t constitute one on its own.
It’s also not just the right environment or set of conditions. Having low liquidity needs, an IPS that allows for long lock-up periods, and/or a board that gives you sufficient autonomy doesn’t necessarily make you a long-term investor. These are helpful conditions but don’t ensure a long-term mindset.
It’s also not just the allocation. Private capital can reinforce or be a sign of a long-term philosophy but investing in private markets doesn’t necessarily preclude a short-term mindset (more on that in a moment).
So, what is it?
The right time horizon, conditions, and asset allocation facilitate a long-term investment system, but there’s more to the story. True long termism is when strategy and behavior are aligned. Said a few other ways, it’s:
A convicted belief in a positive outcome with little concern for when the payoff occurs, and a holding period dependent on the rate at which price and value converge.
The expectation of holding an asset for an indefinite period, and the capability to do so.
- Or, as Geoff succinctly puts it: “An investor’s horizon is the length of time that they can stay committed to a strategy despite adverse but unanticipated investment outcomes or changes in their organizational circumstances.”
Long-term investments and long-term investing: when semantics matter.
As we’ve alluded above, it’s a mistake to assume that investing in illiquid assets is necessarily indicative of long termism. This is particularly true given the trend of holding illiquid assets in liquid fund vehicles, like the wave of private credit ETFs that are currently making headlines. Investing in illiquid assets doesn’t necessarily reflect a long-term investment strategy, especially if you’re using a fund vehicle with mismatched liquidity to circumvent a longer capital lock-up period. In other words, short-term viewpoints can still be expressed in long-term investments. By the same token, investing in liquid assets doesn’t necessarily reflect a short-term investment strategy, if your intention (and follow-through) is to hold them for a longer period.
Long-term investments are those with characteristics typical of a long-time horizon, anticipating value creation over a longer period rather than taking advantage of short-term dislocations. But long-term investing is the practice and mindset of maintaining an investment position when you have the opportunity but not the obligation to do so in the face of external pressures. It’s choosing to weather short-term storms because you planned ahead, are prepared for them, and believe it’s worth sticking it out. That’s not to say that agility and rebalancing are inherently antithetical to a long-term mindset, or that you should be sticking your head in the sand and taking “set it and forget it” to the extreme. Rebalancing should be expected and planned for within your strategic asset allocation, but if you’re deviating from your organization’s broader investment thesis to improve short-term performance or respond to a short-term market dislocation…you might be a short-term investor.
Okay…now what?
Intention can only take you so far, and there are various factors that ultimately influence the feasibility and success of an investment strategy. Key considerations and potential recommendations for investors that are serious about implementing a long-term investment system include:
Governance: Ensure that you have experienced and properly trained trustees or, at the very least, make sure the board understands, appreciates, and supports an effective long-term strategy and how it might play out over time. Consider whether your board is fanning or extinguishing the flame of career risk that often drives investment professionals towards herd mentality and potentially less rational decisions.
The investor’s toolset: Look at your IPS, meeting policies (their frequency and what you’re talking about), due diligence (ask the GP what their sell philosophy is and to provide case studies), etc. and evaluate whether they’re reinforcing a long-term approach.
Performance measurement: A long-term strategy should employ long-term benchmarks; performance should be assessed on an absolute, risk-premia-focused basis. Evaluate who is responsible for fund performance and for how long.
Compensation structures: Focusing on asset gathering and/or quarterly performance encourage a short-term mindset; incentives should be structured in line with the company’s success and client return over the long term.
There's a lot more we could say here about the many benefits of a long-term investment strategy (there are probably more than you think!) and red flags to watch out for, but we'll leave that to John and Christie. Check out the full episode here and go behind the mic with show notes and episodes sources!
About the Contributor
Claire Sawyer is Associate Director of Content Development at CAIA Association. Prior to her current role, she served as Program Manager and Relationship Manager for the UniFi by CAIA™ learning platform. She holds the Sustainability and Climate Risk (SCR) certificate from GARP and is a Level 2 CAIA Candidate. She earned a BA in Legal Studies from UC Berkeley.
Learn more about the CAIA Association and how to become part of a professional network that is shaping the future of investing by visiting caia.org.