Both short- and long-term equity investment strategies have potential roles to play in a diverse portfolio, but the overall equity marketplace seems skewed toward shorter-term behaviour. While many managers appear comfortable with short-termism, we suggest that investors consider a number of actions to maximize the benefits of long-term investments.
In their article, “The Long and Winding Road,” Mercer advisors Richard Dell and Alex Bernhardt outline recent research on the decline of long-only equity funds and hidden costs and other issues related to portfolio turnover. They based their essay on Mercer’s report The Long and Winding Road: How Long-Only Equity Managers Turn Over Their Portfolios Every 1.7 Years. This was produced as part of the “Tragedy of the Horizon” research, which seeks to explore the potential for long-term suboptimal allocation of capital due to the finance sector’s limited ability to capture long-term risks within short-term risk-assessment frameworks.
“The portfolio turnover of professionally managed, long-only equity funds has been declining on average for decades despite rising overall stock market turnover during the same period”
In additional interviews with investment managers, they uncovered more insight into this issue, including:
- Manager attention to trading costs in the investment process
- Short-term performance pressures
- Portfolio turnover discussions during due diligence
- Buy-side research versus sell-side short-termism
They also look at portfolio turnover by strategy, including sustainable and responsible investment (SRI) versus non-SRI, quantitative versus fundamental, and value- versus growth-oriented styles. And finally, the authors provide various recommendations for asset owners, asset managers, and regulators to help them make the most of short- and long-term investment decisions.
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