In a panel on “Investing Wisely” held at Horasis Global Meeting last week, a New York-based investor in the audience challenged the panellists with: “while you are praising long-term investing, my average holding period is 7 seconds – and I make money.”
Short-termism vs. long-term investing has long been a topic of discussion in financial markets. While long-term perspectives may have a higher probability of maximizing returns, investors face real barriers when casting their eyes on larger horizons such as regulations (timelines and penalties imposed by regulators), herding attitude (tendency of investors to move together in their investment strategy), lack of data on corporates’ long-term planning, ambiguity aversion, among others.
High scoring Patience Premium stocks exhibit attributes such as fundamentally sound businesses, shareholder-friendly leadership, inexpensive valuations, and positive progress toward sustainability
In recent years, sustainable investing delivered a fresh push towards long-term investing. While ESG integration is an investment discipline that can be applied to different timeframes and it is getting adopted even by hedge funds, it may be through long-term perspectives the opportunities that it generates – from a risk mitigation and return perspective – can be better maximized.
Yet, the market has faced immense difficulty in fully capturing long-term opportunities mostly due to lack of high-quality data. In recent years, companies such as Merck, UPS or Unilever have presented their company’s long-term plans (+5 years) on capital allocations, corporate governance or on industry and mega-trends, for instance, to help investors looking further in time. But only a few follow these practices and long-term investing remains challenging.
To address this, Matarin Capital Management, a New York-based investment firm, together with S&P Dow Jones Indices and the research and data provider Sustainalytics have joined forces around The Matarin Global Long-Term Index, which was designed to allow investors to capture a “patience premium” for long-term investing in the stock markets, which integrates a focus on ESG factors.
High scoring Patience Premium stocks exhibit attributes such as fundamentally sound businesses, shareholder-friendly leadership, inexpensive valuations, and positive progress toward sustainability.
The Index looks at a company’s current E, S, and G rankings compared to a multiyear average and excludes from consideration companies that are worst in class in terms of ESG controversies. Matarin has found these companies’ stocks tend to underperform in the long run.
“Similar to the term structure of interest rates, in which longer-term bonds offer higher interest rates, equity investors may also earn a “patience premium” for longer-term investment. When companies invest to become more sustainable, there can be an immediate cost in the early years on cash- flows or earnings in the short-term focus. But in later years progress toward sustainability can pay off,” says Nili Gilbert, co-founder and portfolio manager at Matarin Capital.
While not exclusively designed to capture the “patience premium,” several other indices are already pointing at the benefits of considering ESG long-term perspectives. If we take a look at indices such as MSCI Emerging Markets, MSCI Europe Index, or MSCI ACWI and compare them with their respective ESG indices, 10-year returns are +3.7, +1.81 and +0.41, respectively.
Family offices, which are less susceptible to the pressures of short-term returns, may indeed be more aligned with the need to generate real and lasting value over the long term. As more listed companies disclose their long-term perspectives and as indices are increasingly able to capture the premium unlocked by long-term perspectives, we are likely to see more family offices investing with longer time horizons.
Rodrigo Tavares is founder and president of the Granito Group, a company that advances the sustainable economy through management consulting, financial advisory, and policy & research. He was nominated Young Global Leader by the World Economic Forum (2017)