Governance and Long-term Investing. Leslie Teo GIC

Transcription

1 Governance and Long-term Investing Leslie Teo GIC

2 Governance frameworks and long-term investing The time frame over which risk premia clearly manifest themselves can be very long Markets are a popularity contest in the short-term Short-term pressures arise because time period is longer than most people s horizon for assessment and risk tolerance Good governance frameworks can help manage the tension between long-term objectives and short-term pressures GIC Private Limited 2

3 Relative return of global equities over 1-year T-Bill during , annualised over different investment horizons Variability of even one of the most basic risk premiums the equity risk premium is high over short horizons 60% Realization of Equity Risk Premium over varying horizons (boxes show 1st-3rd quartile range; stick shows max-min) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 1 year Rolling 3y Rolling 5y Rolling 10y Investment horizon GIC Private Limited 3

4 There are significant external and internal pressures to avoid short-term volatility and losses Mark-tomarket Pressure towards shorttermism External Regulations Client concerns Highfrequency reporting Internal Compensation GIC Private Limited 4

5 And sometimes, we tend to get carried away when we miss the big picture The eurozone has 10 days at most. - Wolfgang Munchau, Nov 2011 GIC Private Limited 5

6 And sometimes, we tend to get carried away when we miss the big picture Suddenly, it has become easy to see how the euro could come apart at the seams. We re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. - Paul Krugman, May 2012 GIC Private Limited 6

7 And sometimes, we tend to get carried away when we miss the big picture We now believe the probability that Greece will leave EMU in the next months is about 90%, and believe the most likely date is in the next 2-3 quarters. - Willem Buiter, July 2012 GIC Private Limited 7

8 Governance frameworks and long-term investing The time frame over which risk premia clearly manifest themselves can be very long Markets are a popularity contest in the short-term Short-term pressures arise because time period is longer than most people s horizon for assessment and risk tolerance Good governance frameworks can help manage the tension between long-term objectives and short-term pressures GIC Private Limited 8

9 A good governance framework encompasses clear objectives, wellaligned investment strategies, and an effective organization Clarity of objectives Aligning investment strategy with objectives Aligning the organization with effective execution of the strategy GIC Private Limited 9

10 Some elements of a governance framework that work What works Realistic conversations over what can or cannot be achieved Clear statement of objectives Important to have clarity on client s risk tolerance. Clear articulation of risk premia that you expect to harvest over long-term Greater understanding of risk, esp. downside Rebalancing Long-term oriented compensation Organizational culture Attracting the right talent Clarity of objectives Aligning investment strategy with objectives Aligning the organization with effective execution of the strategy GIC Private Limited 10

11 There are challenges at every stage Challenges Getting client to clearly state objectives Tension between absolute and relative return mandates High-frequency reporting Balancing longterm objectives with medium-term risk tolerance Clarifying accountabilities for outcomes of longhorizon investments Balancing long-term pay against relevance for current employees Clarity of objectives Aligning investment strategy with objectives Aligning the organization with effective execution of the strategy GIC Private Limited 11

12 Summary The time frame over which risk premia clearly manifest themselves can be very long Markets are a popularity contest in the short-term Short-term pressures arise because time period is longer than most people s horizon for assessment and risk tolerance Good governance frameworks can help manage the tension between long-term objectives and short-term pressures GIC Private Limited 12

13 In volatile markets, it gets harder to distinguish cyclical from structural moves in the short-run Number of times S&P 500 experienced a monthly decline > 5% s 1960s 1970s 1980s 1990s 2000s GIC Private Limited 13