Listen to this article
In the long run, Rodney, we’ll be millionaires. This mash-up of John Maynard Keynes and Del Boy Trotter makes a lot of sense. I think I’ll search for more wisdom in unlikely combinations.
Few FT readers will ever win the lottery. But in the long run, before Keynes’s inevitable prediction comes to pass, many long-term savers could be millionaires. Lovely jubbly.
The long run is where the savings of ordinary people can become substantial thanks to the marvels of compound interest. And the long run is where our savings and our real interests meet.
Typically, our time horizons as savers and investors can be measured in decades, not months. Why, then, is there so much obsession with the short term? It is counterintuitive to think that trying to optimise over a sequence of short-term periods can be as successful as optimising over the long term. The gap is bad for our savings, bad for companies and bad for the economy.
Today, a 60-year-old might expect to still be saving for a few years yet and then to need their capital first to supplement and then to replace their earnings for another 20 years or more.
This fact should be sweeping away received wisdom about investment. Index-targeted active funds have become the mainstay of active investment management for understandable reasons. But those reasons serve the convenience and security of practitioners better than they deliver the best outcomes for clients over the very long periods of time that match their needs.
Index targeting is convenient for advisers and consultants, because it’s very easy to measure success and volatility around that objective.
Index targeting can also be a comfortable place for investment managers. While it is very difficult to outperform an index consistently, it’s very easy to avoid underperforming it by very much. Stick close to the index and you’ll probably have a good year every now and again, possibly just often enough to keep your show on the road indefinitely. It is this incentive that has led to controversies about “closet-indexing”. The fact that the majority of index-targeted funds will not beat their index each year has fuelled the rise of passive investing.
By contrast, a high conviction, long-term approach, where managers choose fewer investments on the basis of their belief in a company, its strategy and management, is a far more exposed place to be. Investment managers who are not good at making those decisions get found out much more quickly. But those who do have skill deliver handsome returns over the long periods that are a match for your needs. In this case, survivor bias really can be your friend.
Good examples of this type of fund manager would include James Anderson, Richard Buxton, Neil Woodford, Terry Smith, Julie Dean, Nick Train and Sebastian Lyon. They have all gone through periods when their style was delivering short-term underperformance but showed they could stick to their principles. For investors who stayed with them for the long term, results have been excellent.
A long-term investment style also lends itself to high-quality engagement with investee companies. If you are investing in a company with the intent of keeping your holding for a very long time, the company’s approach to climate change and its own environmental footprint, to employee development, to diversity, to its tax-paying policies, to pay inequality, to lobbying with integrity, to its own long-term investment in business growth, all of these really matter.
Aligning the interests of clients with the long-term interests of companies has impact not only on investor returns, but on corporate profits, employment, the environment and the tax receipts that underpin education, infrastructure and the welfare state.
Large passive investors such as Legal & General and BlackRock are also committed to the long term because they cannot sell shares in the way that active managers can. As agents of investors’ money, they see it as their responsibility to work with companies to help them do better over the long term as a way of generating better returns within the passive structure.
Long-term approaches will set the right incentives for company managements to deliver over the long term. Short-term investment sets perverse incentives for company management to do things that may improve the share price today but at the cost of wasted opportunity to achieve overall better returns later on. A classic example has been the rise of share buybacks, where short-term earnings per share may be boosted but where capital for investment in people, research or new plant and products is suppressed.
Individuals should be able to rely on their advisers and investment managers to act in their best interests and in alignment with their long-term time horizons. But the demands that individuals make of their investment managers can themselves often be misaligned to their own long-term interests and objectives.
The investment industry tends to think of risk as short-term volatility. Long-term investors should see risk as being manifested by the possibility of permanent loss of capital. Short-term volatility is relevant to investors only at the level of emotions that lead them astray.
Legendary investor Warren Buffett says: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Investors should follow his advice, overcome their excessive aversion to short-term loss, accept volatility and demand long-term and high-conviction strategies from investment managers who have shown they can last the course. Then, in the long run, Rodney, they really could be millionaires.
Daniel Godfrey is former chief executive of the Investment Association. Twitter:@danielgodfrey_; email@example.com