Long-termism

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Don’t look for it in the dictionary, it doesn’t exist! And while it makes sense for it to be missing from French dictionaries – purists will applaud the fact since it’s an Anglicism – the phrase is also non-existent in English, despite the fact that its opposite, short-termism, boasts an entry in the Cambridge Dictionary. A sign of the times? 

The question is certainly worth posing. In the asset management industry, “long term” as a notion has become a scarce commodity. A panel of experts[1] tasked by the European Commission with making recommendations for more sustainable finance, has published a report that contains a perplexing statistic. The average holding period of a portfolio company in Europe has plummeted from 8 years to 8 months in the space of 20 years.[2] European managers investing in listed equities turn over their entire portfolio every 20 months on average. That’s pretty much the opposite of a long-term approach…

The report highlights the real-time availability of information, the assessment of performance over increasingly short periods and the mounting pace at which financial information is released.

 

Down with the tyranny of the short term

Early in the summer, Jamie Dimon, Chairman and CEO of JP Morgan Chase & Co, and Warren Buffett, Chairman of Berkshire Hathaway, co-signed in The Wall Street Journal a manifesto that sounds a warning against the harmful effects of short-termism on the economy. These iconic investors notably advocate the abolition of quarterly earnings per share (EPS) guidance, a common practice in the United States. They describe how tempting it can be to delay certain investments (such as R&D) or expenses (hiring) so as to deliver targets of this nature, thereby compromising the company’s growth. A recent study released by the American Accounting Association shows that companies that only report annual earnings enjoy stronger growth and greater return on assets than those that report quarterly. Their arguments prompted Donald Trump to ask the US regulator (SEC) to look into the possibility of abandoning quarterly earnings reports in favour of semi-annual publications.

On top of the obvious negative effects, quarterly analysis is often not very meaningful. Depending on whether Easter falls in the first or second quarter, or whether Chinese New Year is in January or February (causing the build-up of inventories to take place some years in December and others in January), companies can be required to waste time explaining small gaps. But on the scale of a half or full year, the effect would be virtually imperceptible. While we are firm believers in transparency, it is clear that this virtue has reached its limits.

Long-term vision

In Europe, a number of big business leaders, keen advocates of the long-term vision, are starting to make their voices heard. They share the ability to make their every decision dovetail with the company’s long-term strategy. They take each and every opportunity to remind people that their management is sustainable. This year’s interim reporting season offered some examples: Jean-Dominique Senard, CEO of Michelin, Jean-Paul Agon, CEO of L’Oréal and Paul Polman, CEO of Unilever, all used the term “long-term” on many occasions in presenting their results. Since taking the helm in 2009, Mr Polman has even gone so far as to end the practice of issuing quarterly EPS guidance, waging that he was pretty unlikely to be fired for doing so on the very day he took office!

Our SRI funds are proud to be investors in these companies led by visionaries whose management looks beyond the current quarter. Refusing to yield to the tyranny of the short term has made them the artisans of sustainable value creation.

[1] High Level Expert Group on Sustainable Finance (HLEG)
[2] From 1997 to today
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