Page 27 - Taking Stock 22 Summer 2019

These trends have resulted in an investment environment where time horizons have become compressed, increasing the incidence of speculative trading around second guessing consensus earnings estimates, sentiment indicators, or taking minor tactical bets against technically-constructed benchmarks. This focus bears little resemblance to the end clients’ return expectations or attitudes to risk. Short-termism refers to the focus on short time periods that prioritise near-term shareholder interests over the long-term growth of a company. In one study, management consultants McKinsey & Company found that 87% of companies experience pressure from investors to demonstrate strong nancial performance within two years or less, while 65% of executives said that short-term pressure from investors has increased over the past ve years1. The growing anxiety over short-term performance is having an impact on management teams and capital allocation decisions. According to the FCLT Global survey (a not-for-pro t research organisation), 61% of executives and directors said they would cut discretionary spending to avoid risking an earnings miss. A further 47% said they would delay starting a new project in such a situation, even if doing so led to a potential sacri ce in value2. This is not good capital allocation practice as it involves turning away sensible long-term value-accretive projects to meet the short- term expectations of similarly short-term thinking shareholders. It leads to poor long- term outcomes for savers and borrowers alike, and the inef cient use of capital is a drag on the health of the broader economy and to society at large. When it comes to short-term information processing, computers that are empowered with algorithmic approaches and arti cial intelligence tend to be much more ef cient than humans. The exponential growth in computing power is making short-term informational advantage increasingly dif cult for humans to achieve. The short-term has been commoditised. Yet despite a wealth of empirical evidence suggesting that markets remain inef cient at pricing long-term sustainable fundamentals, average holding periods can be still be measured in months and often days rather than years. Portfolios have become less ‘human’ in their approach and more programmatic as the industry attempts to automate the collection and analysis of results, news and data, arbitraging away any short- term informational advantage. This trend has been going on for many years. This decay of near-term informational advantage is one of the greatest challenges facing active investing. Long-term pricing inef ciency is not new – its causes are rooted within human behaviour. Humans exhibit a general tendency to underestimate long-term effects and overestimate short-term ones. In investing, this leads to markets undervaluing companies that can generate secular growth in cash ows. While short-termism may offer immediate payoffs, it could have adverse consequences for the long-term, including underperformance for long-term investors, which may lead to an economy underperforming, as companies invest less in seeking long-term success. 1 McKinsey&Company, 2017, Measuring the economic impact of short-termism. 2 FCLT Global, 2017, Rising to the challenge of short-termism. !BACK TO FEATURES 27 Taking Stock