(Pictured: David Neal)
by Barrie Dunstan
The investment management industry is, very slowly, raising its eyes from its short-termism to take on a long-term perspective. But David Neal thinks fund managers need to move faster.
Otherwise, he says, those investors taking a long-term view, which are increasingly moving to internal funds management and becoming more professional, will do it themselves.
Neal, the managing director of Australia’s largest long-term investor – the Future Fund – gave this warning at a seminar in Melbourne last week, organised by the Centre for International Finance and Regulation (CIFR) which launched, a three-paper, 140-page study of institutional investors’ perspectives on long-term investing by its research director, Geoff Warren.
The Future Fund collaborated with the CIFR, which is financed by the Commonwealth and NSW governments and headed by Professor David Gallagher. The Future Fund offered guidance, encouragement – plus examples from its own experience.
The Future Fund has sophisticated investment processes and aims to meet its mandated return, which it has interpreted as CPI plus 4.5 per cent to 5.5 per cent, over a rolling 10-year average period, largely using external local and international managers. (The fund is unable, under its Commonwealth mandate, to have internal investment management.) It has earned 7.4 per cent annually over its seven-plus years, which has seen its assets expand by $44 billion from the original amount to more than $104 billion at the end of September. But over its relatively short life, Neal said, “we certainly don’t think we have all the answers.”
Neal told the seminar that “in many cases it feels like the financial system serves the interests (of) the agents who have dominated the system for a number of decades, rather than those of the asset owners and their beneficiaries.”
The culture at a long-term investor offered a way of escaping the principal/agent issues that plagued attempts to invest long-term, he said. Both here and overseas, asset owners were professionalising and becoming a much more competitive part of the landscape.
Neal said: “The business models of investment banks and investment managers need to change if they are to be sustainable. This will take time to fully play out. It’s a bit like water on a stone, but change is underway.”
He said it would be a long process to change the focus of fund managers from short to long term. “They have to change or we will do it ourselves and they will eventually perish.”
In his presentation, Warren concluded that long-term investing needed to manage agency issues, build the right culture in an organisation, resist reacting to short term news and maintain focus on the long-term.
On the key question of what is the long-term, Professor Jack Gray from the University of Technology Sydney’s Centre for Capital Market Dysfunctionality, noted that investment thinkers had been grappling with this since 1936 (John Maynard Keynes) and 1968 (Warren Buffett).
As the moderator of discussion, Gray boldly nominated seven years as his view of long-term, citing biblical references and even the fact that when people are asked to pick a number between one and 10, 40 per cent name seven. Alternatively, for those wanting a longer term alternative, he suggested a generation or perhaps 30 years.
Gray offered an insight into the challenge of focussing on the long term from his time with value manager GMO and its co-founder Jeremy Grantham. During the tech boom, the firm stood apart from the market and at one stage its underperformance saw it lose two-thirds of its funds under management. That took courage, helped by the fact that Grantham and others owned the firm.
While Grantham was a long-term value investor, he also was forever throwing up short-term ideas. Gray said Grantham was aware enough this tendency to institute a system to stop himself doing short-term things.