Instilling a culture based on achieving long-term objectives does not come naturally, but it is the only way to build sustainable investment businesses, according to Towers Watson.
Towers Watson head of the Thinking Ahead Group Tim Hodgson argued that investment management businesses might be skewed towards short term gain, but their clients could also do more to instill long-term thinking into their managers.
"We go back to the asset owner and say: 'Why then are you rewarding your investment manager with a one-year performance fee or why are you paying on the basis of assets under management? And should the asset owners be doing more to change the incentive structure?'
"Are the asset owners, are the clients of the fund managers, truly long term?
"You can probably attribute some of the blame there, but if people assume that the fund managers are acting in perfect alignment with their clients' wishes . well I think that is naïve."
But Hodgson admitted it was easy to point out the problems, but hard to find adequate solutions.
"What we are talking about here is changing the fundamental underpinnings of the entire industry's structure. When you start messing like that you will get unintended consequences," he said.
As part of the effort to what Hodgson termed institutionalising long-termism, Towers Watson has been working with clients to design mandates that work on the basis of 10-year objectives.
A number of these mandates are now reaching their seventh year and provide an insight into the success of the model.
"They have been a mixed success," Hodgson said.
"I would say it was a good idea and there should be more of it, but I wouldn't say that they have been an unqualified success in living with the volatility of performance."
Part of the problem is that when setting long-term investment objectives, it is hard to implement an objective system of measuring a manager's progress.
"Quite a lot of these mandates were expressed as a CPI (consumer price index) plus x per cent target, on the basis that is absolutely all you could ask for," Hodgson said.
"Unfortunately in the meantime most of the returns would have been influenced by the market beta and that is going to vary from CPI by massive amounts in a 12-month period."
To monitor the performance of a manager, Towers Watson developed a scorecard with multiple performance measures.
But this monitoring system was quite labour intensive and drew heavily on a company's resources.
Despite the difficulties in adopting long-term models, Hodgson argued there were steps companies could take to achieve a better balance between short and long-term objectives.
Risk governance is an important instrument in this.
"It sounds crazy, but we would argue that risk and return aren't very well integrated," Hodgson said.
"[There] needs to be risk-return management, whereas we would argue that most people spend most of their time on risk measurement.
"Management is about changing your portfolio in anticipation of events, whereas measurement is about seeing what you should have done in the past."
Asset owners should have a clear plan on what they were trying to achieve and how they wanted to reach their goals, he said.
"What does success look like? Is it appreciation in real terms over a particular period or are you investing in perpetuity?" he said.
"Once you have a very clear understanding of what your mission is, you can then decide: what is your tolerance for shortfall?
"If we are ahead of plan, it makes sense to de-risk and take some profit. If you are below plan ... that is a much more difficult problem to grapple with."
