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How Short Term Investing is Damaging Returns and Society

Former Investment Association chief and FCA consultant Daniel Godfrey believes short-termism is damaging returns and is launching a fund to prove it

Emma Wall 22 August, 2017 | 3:41PM

 

 

Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm here today with Daniel Godfrey, Founder of the People's Trust, to talk about sustainable investing.

Hello, Daniel.

Daniel Godfrey: Hi, Emma.

Wall: So, it's fair to say you know a bit about the city. You were Chief Executive of The Investment Association and indeed, consultant for the FCA. And during that time what you've learned, what would you say, I suppose, was wrong with the current model of investment management?

Godfrey: I think very simply put, I'd say that the purpose of investment is sustainable wealth creation and that delivers long-term absolute returns to the providers of capital, but it also does enormously beneficial things for the economy and society such as better jobs, investing in human capital, innovation, the sorts of things actually that create the productivity growth that we are currently puzzling about why we haven't got any, that delivers GDP growth and tax revenues, and without that there's no way you can create a society that works for the many not just the few.

So, investment has the most wonderful wholesome purpose to it. But if you look at our sausage machine of a financial services industry and the way it steers capital through its chain of investment into companies and then deployed by boards and chief executives, the critical success factor is short-term relative return. And it has to be the case.

That focus and obsession with short-term relative has to come at a cost to long-term absolute. And so, I think, we are inadvertently depriving consumers of returns and we're depriving the economy and society of the wealth creation we need to make the world a better place.

Wall: And that is the crux of the matter, isn't it? Because the short-termism has become so embedded in the way that the media reports, that investors think, that asset managers provide information to their end investors, you're trying to break this cycle with the People's Trust. How much of a challenge do you think that's going to be?

Godfrey: Well, the core challenge initially is to try to set up an alternative investment chain that's impervious to the pressures of short-termism that the rest of the industry suffers. And of course, the first way we've done that is to set it up as an investment trust so that it's like all investment trusts owned by its customers but also to set it up with no commercial backing. So, I have no P&L risk; I have no career risk in sticking to our long-term guns.

Then it's really all about can we encourage consumers, including institutions and intermediaries, to understand and act on the really rational assumption that if we can identify companies that are capable of compounding returns over the long-term through sustainable, responsible behavior, then over long periods of time if you're patient, you should achieve better returns and with less risk and a better impact on society. And that's a very compelling proposition.

I regard it a bit like food where we are all hard-wired to like sugar but we are quite capable of understanding that in fact if all we did was eat sugar, we'd all have diabetes and die very quickly. So, I think, we need as an industry to convince consumers, intermediaries and institutions that 5 A Day is better for us than sugar.

Wall: And what has the response so far been because it sounds like an admirable philosophy, but surely if it was that easy, people would already be doing it, they'd be going for those long-term sustainable returns?

Godfrey: Well, I think, the problem is that we actually have perverse incentives inside our system in a very, very tightly bound investment chain, which means that no link in the chain actually has the power to break it or transform it for themselves. So, in a sense, it's everybody's fault. And so, also in a sense, it's nobody's fault. So, I think, actually what we need is something that can step outside it.

I'm finding that there's been a fantastic response both from people in the industry and from consumers. I mean, after all, we have 2,500 founders who have crowdsourced the setup costs for the People's Trust without getting any investment in return simply because they like the idea. So, I think, what's yet to be proven, of course, is, will they stick the course? Or as I put it to them, when we hit turbulence, you need to put on your seatbelt, not your parachute.

All the evidence says that investors lose money by trying to make timing decisions, so to stick with these great companies over long periods of time. And do the one thing really that asset managers can add value in, which I think is stewardship rather than hunting for beta, rather than hunting for alpha. So, let's make beta better at the companies we are in. Let's make the index better and everyone wins.

Wall: Daniel, thank you very much.

Godfrey: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk