Long-term investment offers investors both return opportunities and the potential to reduce the drag on returns, according to a study by the Thinking Ahead institute.
The research, entitled “The search for a long-term premium”, identified eight building blocks of long-horizon investment value, with the expected size of the net premium (between 0.5 per cent and 1.5 per cent per annum) and dependent on investors’ governance, asset size, mind set and investment processes.
Also, the study differentiated between those building blocks and strategies that provided long-term return opportunities and those that led to lower long-term costs and/or to mitigate losses.
The return-drag strategies included: ‘round-trip’ decisions such as firing and replacing managers, forced selling which could reduce returns by 1.5 per cent to two per cent per annum and transaction costs, which were defined as significant savings that could be made by avoiding unnecessary turnover.
The ‘return-opportunity’ building blocks included:
- Active ownership and investing in long-term companies;
- Liquidity provision which had the potential to earn one per cent per annum additional returns;
- Mispricing effects captured via smart betas or factors that could add more than 1.5 per cent;
- Illiquidity risk premium (by foregoing access to liquidity) which meant long-horizon investors could earn a return in a range of 0.5 per cent to two per cent; and
- Thematic investing.
The authors of the study also stressed that not all of these blocks were independent and consequently the components could not be simply added together to derive the long-term premium.
Willis Towers Watson’s senior investment consultant and lead author of the report, Liang Yin, said: “On the basis of this research, produced with our members, it is the institute’s clear view that the search for a long-term premium has been successful”.
“However, capturing the benefits of long-horizon investing is likely to require a major shift of mind set and significantly expanded skill-sets by investors.”
