Centre for International Finance and Regulation research director Dr Geoff Warren yesterday released three working papers in collaboration with the Future Fund.
The third and final paper in the series, Designing an investment organisation for long-term investing, addresses the four ‘building blocks’ that are required to “successfully pursue long-term investing”.
The organisation must be correctly ‘aligned’ in order to manage the ‘principal/agency’ issues that are rampant across multi-layered organisations, Dr Warren said.
The right incentives must be put in place, with short-term outcomes viewed as “markers not destinations”, he said.
Finally, investment houses must establish a long-term investment approach while filtering out short-term noise, as well as harbouring discretion over trading, Dr Warren said.
The basis for an organisation’s alignment is its stated guiding principle or ‘mission statement’, he said – citing the Future Fund and the New Zealand Super Fund in particular.
The Future Fund states: “We are a funds management business focused on delivering high, risk-adjusted returns over the long term on contributions to special purpose public funds”.
Similarly, the New Zealand Super Fund declares: “Maximise the Fund’s return over the long term, without undue risk, so as to reduce future New Zealanders’ tax burden.”
Dr Warren contrasts these principles with some of the largest investment managers, which instead focus on ‘delivering performance’ or ‘meeting investor needs’.
“AMP Capital refers to their ‘commitment to delivering outstanding investment outcomes for our clients’ as being at the heart of everything they do,” he said.
“Colonial First State presents itself as offering ‘An active management approach seeking to outperform … Put simply, we aim to outperform the benchmark’,” Dr Warren said.
“As a global example, Fidelity Worldwide states: ‘Our fundamental mission is to help customers and clients achieve their financial objectives’,” he said.
Although there is nothing wrong with these principles, “they are not as likely to be as effective as an expressed and pointed reference to the long term if the intention is to pursue long-term investing”, Dr Warren said.
