FOCUSING ON LONG-TERM OUTCOMES
The last decade has tested market participants’ ability to withstand short-term volatility while navigating long-term structural changes. We live in a world where the pace of change in politics, technology and social dynamics can seem astounding, even overwhelming.
NAVIGATING THE FUTURE AT WARP SPEED
American author and investor Ray Kurzweil, in his book titled The Singularity is Near, talks about a point in the not-too-distant future when machine technology merges with, and enhances, human capabilities. The implication of this for our daily existence is open for debate. However, what is less debatable are his observations about the long-term trend towards increasing mechanisation and the exponential growth in computing power.
This trend is observable today in the field of robotics. For example, the payback time for an industrial robotic arm has decreased from 5.3 years to 1.5 years over the period 2010 – 20161 . Coupled with this, there has been a rapid increase in technological sophistication and functionality. Between 2009 and 2015, the Republic of Korea doubled its robot density from 231 to 531(measured as the number of industrial robots per 10 000 employees2). This trend is mirrored in other Asian countries as well as in Europe, with the International Federation of Robotics indicating that by 2019 more than 1.4 million new industrial robots will be installed in factories around the world.
Will such automation positively or negatively impact economic growth, well-being and employment levels? The implications are not yet fully understood, however, many turn to Kurzweil’s work on long-term trend analysis to try and understand how best to navigate this brave new world.
A SYSTEMIC VIEW
Plotting a route forward in an uncertain world is helped by having a secure long-term view. For example, our MacroSolutions boutique tracks asset class returns annually in their Long-Term Perspectives research (visit our website – www.oldmutualinvest – for the latest issue), with research spanning an 87-year period.
Being a long-term investor is, however, not just about being able to understand long-term trends. It is also about being able to have a systemic view of the market and its connectivity to other social and biophysical systems. Seeing the world in this way results in a clearer appreciation of how long-standing ESG trends impact the stability and viability of markets.
For us responsible investment is central to our client promise and we see it as being additive to our competitive advantage. We understand that for committed long-term investors and other core market actors, the interconnectivity of ESG issues and long-term market returns is no longer an issue of idle contemplation. In June 2017, Swiss RE announced that by the end of 20173, all of its US$130bn global portfolio will be shifted to ESG benchmarks.
Within our business Old Mutual Customised Solutions has led the domestic market with its family of ESG indices. These are low tracking error products designed to offer market returns with a measurable ESG delta to the benchmark. In simple terms, such best-in-class strategies offer a very low cost option on the long-term mispricing of ESG risks. You can read more about this in Frank Sibiya and Shariefa Parker’s article
For asset owners with long-term liability horizons it is becoming increasingly clear that pursuing short-term returns in a manner that potentially undermines long-term system stability is not a prudent course of action.
WHY FOCUSING ON THE LONG-TERM MATTERS
Concern around the short-term focus of investors and issuers can be seen as problematic at a systemic level. Primarily, short-termism undermines future economic growth due to the lack of long-term capital investment, which ultimately leads to slower GDP growth, higher unemployment levels and lower future investment returns for savers4. To test this thinking, the global advocacy group Focusing Capital on the Long Term, in collaboration with McKinsey, undertook research on the performance of companies with a long-term value focus. Published in the Harvard Business review5, the research indicates that “companies that manage for long-term value creation have consistently outperformed their peers since 2001, across almost every financial metric that matters” – see Chart 2.
In February 2017, the McKinsey Global Institute also released a discussion paper titled Measuring the Economic Impact of Short-Termism6. Its main findings were that long-term firms:
- Exhibit stronger fundamentals
- Deliver superior financial performance
- Continue to invest in difficult times
- Add more to economic output and growth
The Harvard professor Michael Porter also spoke of this long-term systemic approach in his work on shared value. He defined shared value as “a management strategy in which companies find business opportunities in social and environmental problems.” He indicated that in the current global context this business approach represents one of the most significant opportunities for long-term investment.
These findings show that there are indeed rewards for asset managers who align their business models and investment approach with long-term value creation.
AS INVESTED AS YOU ARE
As the investment arm of Old Mutual Group, we have a powerful partnership with the Old Mutual Life Assurance Company (South Africa), which ensures that we invest with a long-term horizon. Our approach to responsible investment is an important contributor to maintaining this culture of long-term thinking and sustainability. We believe this sets us up collectively for mutual success, and rewards not only our clients but also our staff and our broader stakeholders.
We take pride in the manner in which we ensure long-term alignment within and across our multi-boutique structure. Our investment teams across Old Mutual Investment Group are actively incentivised with boutique and group level equity. And, because we are as invested as you are, our fund managers must retain a portion of their incentive pay in the products they manage. These measures ensure that our teams are truly aligned with our client outcomes in the long term, which we believe is at the heart of our consistent, market-leading long-term returns.