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

Author: Alex Bernhardt, Rich Dell, Jane Ambachtsheer and Ryan Pollice

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 short-term 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.



http://www.tragedyofthehorizon.com/The-Long-And-Winding-Road.pdf
Source: http://www.tragedyofthehorizon.com/The-Long-A...

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