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A long-term future in an uncertain world
GIC’s annual thought leadership event, GIC Insights, was held here on 15 September 2017. It saw 110 prominent global business leaders deliberate long-term issues relevant to the international business and investment community. The theme was Asia’s Evolving Role in an Uncertain World, and topics included Asia’s Challenges and Prospects over the Next Decade, Artificial Intelligence for Traditional Industries, and A Long-Term Future in an Uncertain World.
Below is GIC's excerpt from from the panel on the topic of A Long-Term Future in an Uncertain World:
Why is long-term investment important?
- Capital ultimately belongs to individual savers and citizens. Long-term investment aligns with the interest of the savers, who as individuals have long-term goals, such as achieving financial security, philanthropic goals, and providing education.
- A long-term approach allows investors to capture long-term trends, harvest the illiquidity premium, and compound returns for the long-term.
- Costs of short-termism are well known. A recent McKinsey study showed that short-termism cost the US economy US$1 trillion in GDP growth, and almost 5 million jobs over the past decade. Short-termism hurts savers in their longer-term wealth accumulation, but also jeopardises overall societal growth and prosperity.
- Despite this, short-term decision making remains prevalent, and businesses are not spending enough capital on research and development, or investing in outcomes that lead to greater productivity. This is largely due to the gap between understanding and practice. Businesses know the value of the long-term perspective and outcomes, but are trapped by current market conditions, excessive public scrutiny, and the need to maintain short-term reserves.
How should companies avoid short-termism?
- Big corporations tend to act short-term due to the need for success-assessment metrics. With the long chain of principal-agent relationships present in most large corporations, metrics are required to assess whether the next person in the chain is performing well, but these same metrics also incentivise short-term behaviour.
- Creating a corporate culture that values the long-term perspective and de-emphasises short-term performance metrics will help stave off the volatility and emotional pressures seen in the financial markets. This can be done by 1) distinguishing between process and outcomes & 2) paying attention to how companies design incentives, mandates, evaluation criteria, and even internal communications.
- Organisations should engage their clients and stakeholders actively to ensure that stakeholders understand the changes in the investment environment. Spending time to bring everyone to the same level of understanding is crucial, particularly in an unpredictable geopolitical environment with regular shocks.
How should companies manage risk in the long-term?
- Diversification is crucial for risk management. In addressing risks, some humility is crucial; in an environment where traditional risk premiums have shrunk, investors should diversify their portfolios to keep risk lower overall, while working harder to find and create new opportunities.
- Despite the risks inherent in long-term investment, organisations need to remain exposed to the market and to the risks that come with exposure to the equity markets and alternative assets.
- However, a fixed exposure to equities is not the same as a fixed exposure to risk; investors should take a dynamic approach to risk exposure.
- Long-term investors can reflect on whether a market is complacent or excessively scared, and identify prices that look anomalous in the longer-term perspective.
- Risks should be taken in context of the returns
- The debate should be more about how to construct systems that can remove short-term, emotional decision-making when investment and corporate decisions are made. If without the advantage of long-term horizons, investors can:
- Seek out people and build structures that can interpret short-term signals well.
- Invest heavily in technology, and ensure that they are ahead of the curve in trading analytics.
- Use economies of scale, and exploit competitive advantages, however small. Eg. Small savings from better trade execution, when multiplied across the portfolio, can be very impactful.
What are the trends that long-term investors can capitalise on?
- Long-term investments offer flexibility in adjusting market exposure; it gives organisations and patient investors the capacity to capture long-term trends.
- One key trend is the digitalisation of the economy, which will have a huge impact when AI becomes more ubiquitous.
- An economy running on e-commerce, autonomous vehicles, online payments, and other similar phenomena will require greater data-gathering capacities, which means that data analytics and data centres will become crucial investments.
- Cybersecurity solutions – amongst many other data-related services – will become one essential support component of the digital economy.
- Another is demographic change, which requires investors to respond to issues of ageing, and differences in lifestyle/consumption preferences of baby boomers, millennials, and Generation Z.
- Ageing baby boomer population will lead to increased demand for healthcare related services.
- Younger generations (millennials and Gen Z) value experiences (particularly those that can be shared) over material goods. Efficiency, while important, is not as much of a priority as personalised service and shared experiences.
- Implications for companies who need to reinvent themselves. Rapidly-changing technology cycles and younger generations with little brand loyalty are likely to shorten corporate lifespans.
- The final one is climate change, which long-term investors have not paid enough attention to, and will need to assess the risks it poses to their portfolios.
- One way of using technology to become a better long-term investor is to approach this via ODE:Offence – Actively source, test, and invest in new technologies;
- Defence – Understand the competitive threat of technology/disruptors on the incumbents in the existing portfolio;
- Enterprise – Embrace technology from organizational point of view, including new systems, processes, and new ways of thinking – even being willing to set up separate business units that have a completely different working philosophy and approach.