GLOBAL – Large investors have problems making the most of their long-term investment horizons because they follow short-term investment processes, a survey has found.
Respondents to the 2013 MSCI Global Asset Owner Survey cited different reasons why investment processes were short term.
They mentioned governance issues as well as a lack of methodological framework for making and monitoring investment decisions with a long-time horizon, according to a paper on the survey findings by Peter Hobbs, managing director of research at IPD.
The paper said: “The biggest tension in the asset allocation process seems to be that,
while asset owners generally have long investment time horizons, they face difficulties in exploiting the opportunities these long horizons offer them.”
The survey took in responses from staff at 80 asset owners around the world that had $3.9trn (€2.9trn) in assets among them, and collected public data from 138 asset owners representing $10.3trn.
The responses showed that governance structures shortened the effective investment horizon, the paper’s authors said.
“For example, survey participants identified the composition of the board and the length of the election cycle as reasons for the investment process to be shorter,” they said.
Another factor they noted was the period over which staff performance was evaluated.
But even if there were a governance structure allowing asset owners to follow long-horizon investment processes, the paper noted there was no consensus on how such processes would operate.
The survey also found the combination of factors that made property attractive to investors could also create big problems.
Most asset owners invested in real estate for its mix of income, inflation-hedging, diversification and return.
But this combination of characteristics makes it difficult for risk managers to understand the risks of exposure to the asset type, and integrate any analysis with other asset classes, the survey concluded.
There is a lack of clarity of the role of real estate, and this means there can be misalignment through the property investment process, it said.
“Fundamentally, this misalignment can occur between the strategic role for real estate and the actual exposure of the real estate portfolio,” it said.
It said this could happen because benchmarks were used in the wrong way or because the portfolio and asset-specific risks were not monitored enough, according to the survey’s conclusion.
Both of these mismatches can lead to style drift in the actual real estate exposure, it said.