Benefits Of Long-Term Investment Horizons

Adansonia’s investment process focuses on a 5-year plus investment horizon. This allows us to better capture key long-term investment themes and industry developments in our assessment of any company as of today. This approach helps our thinking be ahead of the markets’, with Adansonia identifying value for its clients generally ahead of it being priced by market consensus.

Every stock held in our portfolios is valued on fundamentals with this long-term thinking; however we continuously ensure each stock is still deemed to be attractively priced as at today. Our longer-term investment horizon helps us make sensible investments and guides us towards well managed, blue chip companies that have high profitability, coupled with strong and consistent growth.

A longer-term investment horizon helps investors make sensible well thought-out investment decisions by focusing their attention on the bigger picture and discounting market noise. What the market is saying today, both vocally and via its pricing, is often extremely different to what it was saying two years ago, or what it will be saying two years from today.

By looking through today’s market noise, trends and fads, we not only avoid the pitfalls of short-term emotion-driven investing, but we can actually take advantage of opportunities presented by the market’s short-term thinking. For example a surprisingly disappointing earnings number might indicate several tough financial quarters await a company. However, as short-term investors rush to the exit fearing the immediate outlook for the company, a significant opportunity may present itself as they fail to look ahead and price in what might be a very promising longer-term investment opportunity over the years that ensue.

A longer-term investment outlook is also essential in understanding, and pricing, long-term but slow-moving market themes. For instance, the global transition towards electric vehicles is just one example of such a market theme. Over the next decade the market will most likely get overly excited by this theme, misunderstand it and its impact on other industries, over-price it, and misallocate new capital, then get bored of it and move on, only to then return again, and so on. While this sequential short-term thinking will generate substantial volatility and influence day-to-day pricing, it will not alter the fundamental slow-moving multi-decade transformation happening in the background. This disjoint between short-term market emotion and long-term fundamental value creates opportunities.

Lastly, investing with a longer-term investment horizon often leads to lower turnover within a portfolio which can be very beneficial. Lower portfolio turnover reduces transaction costs as less buying and selling occurs. However, more significantly, lower turnover in a portfolio can reduce realised capital gains and therefore be far more tax efficient, improving after tax returns.

A five year investment horizon is generally much longer than that used by the average active manager, and very much longer than that used by many sell side analysts, brokers, market commentators and the media who often struggle to look past the next quarterly or full year number! But, what about the investment horizon of a company’s board and its management, where is their focus? And does it matter?

McKinsey & Company recently released a discussion paper titled Measuring the Economic Impact of Short Termism (download the report here). Their analysis, which observed a sample of US based companies, concludes that companies classified as ‘long-term’ outperform their shorter-term peers on a range of key economic and financial metrics. Specifically they found:

• Short-termism is increasing. More company management teams are responding to pressure to make shorter term strategic plans to deliver stronger financial results within 2 years or less.

• Long-term firms exhibit stronger fundamentals. See the charts below from the report.

• Long-term companies deliver superior financial performance. That is, these stronger fundaments lead to greater total share-holder returns.

• Long-term companies continue to invest in difficult times. This was measured by assessing Research & Development spend and found that companies investing through the cycle, instead of just for today, outperformed when the cycle improved.

Long-term companies add more to economic output and growth.

Key to Adansonia’s research effort for any listed company is understanding and gauging the strength of the board and management that steers the company on behalf of its shareholders. We particularly focus on management’s long-term vision and strategic planning, which we compare and contrast with our own long-term investment views, and our assessment of the strength, direction and deliverability of management’s longer-term plans.

Our five year investment horizon is generally quite congruent with the long-term thinking companies, as described by McKinsey & Company in their report, and tends to favour higher quality businesses that are pro-actively managed for the long-term benefit of the company and its shareholders. These are the type of companies Adansonia’s clients hold in their portfolios.

Please note that past performance is not indicative or a guarantee of future performance. This is the case for past returns and past volatility, for both equity markets and currency markets. Investing internationally involves exposure to currency risk, which can increase or decrease performance returns.