New research conducted by Willis Towers Watson and sponsored by the Future Fund has examined institutional investors' attitudes about short-term thinking.
The Smart Leadership: Sound Followership report found that almost two-thirds of asset owners surveyed believe short-termism detracts between 0.34 per cent and 0.66 per cent from annual investment returns.
Twenty-nine per cent of investors believe short-term thinking costs institutional investors between 0.67 per cent and 1 per cent a year, and 6 per cent believe the cost is more than 100 basis points.
The report examined the measures institutional investors are taking to eliminate a short-term mindset from their decision-making.
"Some participants have designed their decision processes and delegations structures to try to limit having to act in the face of short-term pressures," the report found.
"This kind of design could insulate an executive team from compromised decision making and maintain an uninterrupted focus on long-horizon issues.
"Other funds, conversely, clearly see short-term market drawdowns as significant opportunities with implications for the management of liquidity and the option value in cash."
There is often a "clear tension" between liability-driven investment framing (fuelled by liability hedging and mark-to-market elements) and long-term thinking, acknowledged the report.
"The ability of liability-aware funds to look beyond short-term measures will in part dictate their success in capturing the potential benefits aﬀorded to long-term thinking," said the report.
While eliminating short-termism will be "very hard to achieve in practice", the rewards on offer (namely, the improved returns) "make a strong case for concerted efforts to be applied".
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