In it for the long run

I haven't written about the Marathon Club - the grouping of pension funds trying to develop more long-term approaches to investment - for ages, largely because they hadn't seemed to be up to anything. However the other week I bumped into Yusuf Samad, who acts as secretary to the Club, who told me they had a new paper coming out. The paper, Behavioural Aspects Of Investment Management: Lessons From The Credit Crunch, is now on their website.

It's fair to say that the paper pushes a few of my buttons, as it touches both on problems with information (ie investors aren't getting, or seeking to get, the right stuff) and some of the behavioural stuff. Notably they talk about the impact of framing on company reporting, though why stop there, framing surely takes place throughout the investment chain. Maybe it's a sign of my own slightly shifting views, but I'm actually far more interested in what the Club has to say the further it has drifted from SRI. That said, I'm much less convinced that better information or better incentives are going to achieve much change, but then I'm quite cynical about the industry's capacity and desire for change.

Anyway, it's worth a read, here's a few bullets:

• Investment professionals may not be capturing enough of the available information. Investment managers may be too reliant on normal channels of information, e.g. company reporting, EPS, preliminary result announcements, etc. and fail to capture relevant information that may be outside normal channels- “submerged information”. The Marathon Club defines long-term investment as a fundamental, research-oriented approach that assesses all risks to the business.
• Misaligned incentives are widespread throughout the economy and stockmarkets. It may be possible in such cases to create shareholder value through divestiture or restructuring.
• Company reporting may have distortions due to framing. A consistent interpretation of this data that is assumed to underlie market efficiency.
• Quantitative and passive approaches would have little protection if securities are mispriced. Given that securities could be mispriced due to the misaligned incentives, lack of thorough research and distortions in company reporting, passive investors have little protection from loss of capital.