World Economic Forum Cautions on Risks for Long-Term Investors

(March 30, 2011) — In a report headed by 19 major pension and private investment funds, the World Economic Forum (WEF) has warned that policy and investor changes are instrumental in driving the growth of long-term investments.

“This report is directly helpful to institutional investors because it will highlight the challenges inherent to long-term investing and makes recommendations how to address them,” Max von Bismarck, director and head of investors of the World Economic Forum and co-author of the report, told aiCIO. “We’re trying to understand long-term investors in today’s market, how they differ in their abilities to execute long-term strategies, and what constrains them,” he said, adding that while the need for long-term capital is rising, the ability to make long-term investments is dwindling. According to von Bismarck, the financial crisis has spurred questions about whether short-term objectives of institutional investors have outweighed long-term growth and value creation. “We’ve seen shorter and shorter holding periods as investors face increasing long-term constraints.”

According to von Bismarck, long-term investors are crucial for the global economy, acting as counter-cyclical forces in markets during times of high volatility, solving decaying infrastructure problems around the world, and helping to transition effectively from a high carbon to low carbon economy.

He added: “The financial crisis has raised questions about liabilities, as a lot of funds underestimated their true liabilities under stress. A number of endowments, for example, underestimated the amount they needed to contribute to university budgets and faced a real liquidity crisis, which has pushed all types of funds to review their investment beliefs,” he told aiCIO.

Of all types of long-term investors, von Bismarck noted that public pension funds and life insurers face the most constraints which will only increase. “Insurance and pension fund regulation may have unintended adverse consequences on economic growth,” the WEF stated in the report, describing how long-term investing has received increased attention in light of the global economic crisis.

The report by the independent international organization explained how new rules on capital levels and assessing the value of assets can thwart investment in long-term opportunities. Furthermore, the report urged investors to create enhanced measurement of investment performance, implement compensation systems that encourage long-term mandates, and educate stakeholders on long-term investing.