Inaccurate, short-term focus likely to distort long-term investment severely – WEF
Inaccurate measurement of investment values, returns, risks and liabilities can create substantial distortions to long-term investment strategies.
It can also drive long-term investors to adopt a short-term orientation, according to the Measurement, Governance and Long-term Investing report, released March 29, 2012 by the World Economic Forum (WEF).
The report observes that 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. These are however often overlooked.
The report highlighted some of the challenges that may likely hinder long-term investing.
– Market-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 WEF 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,” it adds.
“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.
According to the Forum, the central conclusion and recommendation of the 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.
The report was developed by the WEF in collaboration with a research team led by Josh Lerner of the Harvard Business School.
By Ekow Quandzie