Long-term investment takes courage and a willingness to hold one's nerve, says Aries' Ian Neale as he discusses pension fund commitments.
At the National Association of Pension Funds (NAPF) Annual Conference this month, Prince Charles contrasted pension funds' need for long-term investment success with their focus on quarterly company reports. He urged funds to incorporate sustainability into their long-term strategy.
It's in danger of degenerating into a mere buzzword, but sustainability is no more than the industry itself has been demanding of politicians whose focus too has been on the short-term.
So what prevents us from raising our eyes and focusing on the horizon instead of the road immediately ahead? Why are we so averse to making long-term commitments? I say 'we' because investment strategies are surely mirroring trends in UK society as a whole.
Arguably, a fear of making a mistake, of being proved wrong later on; a fear of being out of line. The herd instinct is particularly strong, it seems, in the pensions industry. Benchmarking, comparisons with what others are doing, is so fashionable.
At times, the willingness to accept the latest trend - be it liability-driven investment, absolute return funds, diversified growth funds, whatever - looks like a surfer's anxiety to catch a wave. In the short-term it might be exhilarating, but it soon levels out.
Prince Charles also urged pension funds to accept more responsibility for influencing the economy, using their power as major investors: to be proactive rather than reactive. Equities are more fruitful than gilts over the long term, as that legendary contrarian George Ross Goobey proved in the 1950s and 60s. Pension funds have more chance of influencing company performance than gilt yields, not least because the latter are more affected by political risk (as quantitative easing has shown).
Last year's shareholder spring was startling only because a few major investors started to flex their muscles and engage meaningfully, instead of simply selling when prospects dipped. Active investment costs more, but if interpreted as encouraging and sharing a focus on long-term success (instead of more frequent trading), the commitment to a sustainable future should be appreciated by generations to follow.
It makes sense, you might say. Warren Buffett, arguably the most successful investor alive, certainly invests for the long-term. It takes courage, a willingness to hold one's nerve. As individuals, pension savers don't feel well enough informed to take these big decisions. But we can demand it of those we trust to look after our interests.
Beset by uncertainty and bewildering complexity, individuals can't, don't and won't make decisions about a future in which they cannot be confident. But pension funds have a long future: liabilities are commitments. What is needed is the courage to sustain those long-term commitments.
Ironically, a stimulus might arise should the much-derided Financial Transaction Tax (FTT) come into force. City traders hate it, for obvious reasons; so too is the NAPF against it, presumably discounting any effect its introduction might have on trading activity.
Perhaps the NAPF might revise their view if the FTT were to lead to a reduction in unproductive portfolio churning, currency speculation and the like, thus lowering pension funds' net asset management bills alongside an extension of the average stock holding period.
Written by Ian Neale, director, Aries Pension & Insurance Systems Ltd
ian@ariespensions.co.uk
