‘Long-term investors’ will remain short-term investors until they move beyond three year contracts with external managers, according to Saker Nusseibeh, chief executive of Hermes.
Challenging delegates at the Equities Summit to question accepted beliefs, Nusseibeh said a bias to owning ‘quality companies’ without carrying out engagement to improve governance was another common investor deceit.
The disconnect between investors’ aims and processes has arisen partly because the industry had come to believe that investment was a science, with financial models giving a sense of comfort, he said.
He saw the GFC as a case study for showing how these scientific models had failed. The investment industry, he said, saw the cost of the GFC as the fall in the value of the assets it holds, ignoring the debt taken on by governments after bailing out the banks that was passed on in taxes to the public or in spending cuts.
“We have not deducted that from our returns, because we think we are separate from that,” he said.
He urged investors to think about owning companies on 20-30 year horizons and to alter the nature of their contracts with fund managers to encourage better engagement.
Doing so should go beyond current beliefs of alpha and beta approaches to investing. In particular, he challenged whether passive managers were doing their job.
“If you engage with companies you need deep and meaningful conversations with companies and it is expensive,” he said. “You cannot provide beta cheaply.”
He suggested one way of gaining such engagement over a long-term horizon was for the investor to directly manage stocks in-house.
Richard Brandweiner, chief investment officer of First State Super, echoed this point at the Equities Summit, by revealing that his team is developing a policy of taking larger stakes in companies in order to influence their boards to achieve better governance and to own these companies over a long-term horizon.