Long-Term Investing: What Determines Investment Horizon?
We in Australia suffer in all sectors from a short-term perspective.
The literature on investment horizon is reviewed in order to enhance the understanding of potential influences on long-term investing by institutional investors. Investment horizon reflects an inter-connected web of influences related to an investor’s circumstances, the design of the investing environment, and the choices that are made by key decision makers. Twelve such influences are identified and discussed. A characterization of investment horizon is offered based around two indicators: discretion over trading and how investment decisions are made, specifically the extent to which they are based on expected near-term price changes versus drivers of long-term value and returns. An overview of the debate over short-term versus long-term investing is also presented.
The appeal of long-term investing continues to garner attention. For example David Gonski, the recent Chairman of the Future Fund and Chancellor of UNSW Australia, has criticized the focus on the short-term, stating “we in Australia suffer in all sectors from a short-term perspective” and calling for greater attention on investing for the long-term.1 Further, the G20 and OECD include institutional investors and long-term investment within their recent agenda.2 We review and augment the literature on investment horizon, with the aim of enhancing understanding of the influences associated with long-term investing from the perspective of institutional investors. We consider literature arising from academic, industry and public policy circles, much of which is directed at the drivers and implications of ‘short-termism’ – the antithesis of long-term investing. This is the first in a series of three papers. The second paper (Warren, 2014b; ‘Paper 2’) investigates the benefits and pitfalls of long-term investing. The third paper (Warren, 2014c; ‘Paper 3) offers recommendations and suggestions for designing an investment organization so that it can successfully pursue long-term investing, drawing on the experience of the Future Fund.
This paper is arranged as follows. Section 2 addresses the definition and characterization of investment horizon. Section 3 discusses why investment horizon matters, including an overview of the short-term versus long-term debate and purported benefits of long-term investing. Section 4 outlines the determinants of investment horizon as appearing in the literature. This section provides a foundation for the work presented in this series of papers. Section 5 concludes.
Dr Geoff Warren, Research Director Centre for International Finance and Regulation