Wednesday, 25 April 2007

Investing for the long term

I posted a while back about the Marathon Club, a group of pension funds that are seeking to stimulate debate and activity around long-term investment strategies. As I've mentioned before, it's a bit bizarre that pension funds seem to be adopting increasingly complex and short-termist approaches to investment when they should be in business (we hope) for decades to come. As Warren Buffett has argued far more eloquently than I could, all that happens when you trade more is that you incur more costs (those costs being the extra fees for the people you pay to trade for you, so they aren't too keen on long-termism...).

The Marathon Club is genuinely trying to develop alternative thinking. They have just issued a new guidance note which sets out some key elements of long-term mandates:

· Trustees’ investment beliefs should be clearly articulated and explicitly recorded – an example of such a document is provided

· Clear objectives for risk and return should be set, based on those beliefs and longterm goals, and communicated clearly to advisers and investment managers

· Selecting of fund managers should be directly linked to how each candidate fits with the trustees’ long-term investment beliefs and objectives, together with the establishment of clear mandate parameters

· Alignment of trustee and manager objectives is best achieved through individual managers owning a stake in their business. Appropriately structured performance incentive fees should also be introduced and maintained

· In building a long-term relationship with a manager, it is important to place greater emphasis on the content rather than the frequency of review meetings, and include an opportunity to test the continuity of or changes to philosophy, process, people and the rationale for stock selection – the Guidance provides examples of this.

· Implementation requires strong governance and leadership, to control strategy and objectives consistent with established investment beliefs, and able to withstand shortterm market movements.

I am a bit sceptical about the potential for change here - partly for behavioural reasons - but I'm glad there is someone out there trying to address these issues. One to keep an eye on.

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