Termism is a philosophy that calls for long-term investment horizons – possibly incentivised by tax or regulatory measures – while criticising short-term investment horizons. There is considerable support for ‘long-termism’ – an increasing number of important, influential and informed individuals write or speak in its favour. CFA UK shares many of the broad concerns and views held by the group that call for a more ‘long-term’ approach, but suggests that it would be more constructive to frame the discussion around value generation rather than around time periods.
“ Making sweeping statements about the virtues of long-termism and the vices of short-termism is a satisfying pastime…but it is a poor way of analysing the dynamics of wealth creation—and it is an even worse way of designing corporate policies.”
– The Economist
This paper suggests that the outcomes that ‘long-termists’ seek could be more effectively achieved by measures other than the imposition of specific holding period requirements. The key issue is value generation and how that can best be achieved – and how the investment profession can contribute towards that – rather than the time period over which that value is generated.
CFA UK advocates that there is no single optimal time horizon from an investment perspective. The time horizon(s) chosen by an asset owner and applied by an investment manager should appropriately reflect the stakeholder’s preferences and requirements. The time horizon(s) is an outcome of a robust process rather than a driver of the process.
CFA UK understands that we do not live in a world where market prices always reflect fundamental value. Company management can manipulate earnings, capital can be mis-allocated and risk can be mis-priced . However, addressing these issues requires an approach that looks at the structural causes of these faults rather than focussing on the length of an investment’s time horizon.
By improving the ability of company managers, asset owners and investment managers to generate value, the system should encourage efficient capital allocation.