The Evidence-Based Investor

THE LONG AND WINDING ROAD: How long-only equity managers turn over their portfolios every 1.7 years

ABOUT THE PROJECT: The 2° Investing Initiative & The Generation Foundation have formed a multi-year
partnership to explore and address the ’Tragedy of the Horizon', describing the potential suboptimal allocation of
capital for the long-term due to the limited ability of the finance sector to capture long-term risks within shortterm
risk-assessment frameworks. The project aims to assess artificial and natural factors that compress the
horizons of market players, such that long-term risks—transmitted from physical assets through to asset owners
and managers—get mispriced. Such a mispricing of long-term risks creates a 'void' between the assets and
liabilities of long-term asset owners and can eventually amount to an asset-liability mismatch.
This report is the second in the Tragedy of the Horizon series and focuses on the role of equity fund managers by
assessing portfolio turnover. Like drivers on their way to a destination for a certain time, we view investors as
agents on a journey with liabilities to meet in the future. Their headlights are their outlook on the future and the
brightness of these headlights determines how fast they are able to drive on a road at night. The faster they
drive, the sooner they may reach their destination and meet all of their liabilities. If the road is full of turns, then
the driver can never turn their brightest beams on and reach full speed. Similarly, high portfolio turnover makes
the investor’s decision-making process full of twists and turns, obstructing their view of long-term performance
and an optimal allocation of capital for the long-term. Giving investors a straighter road, or holding assets for
longer, may make them more efficient drivers and better fiduciaries in the long-term.