This paper suggests that the outcomes that ‘long-termists’ seek could be more effectively achieved by measures other than the imposition of specific holding period requirements. The key issue is value generation and how that can best be achieved – (and how the investment profession can contribute towards that) – rather than the time period over which that value is generated.
CFA UK advocates that there is no single optimal time horizon from an investment perspective. The time horizon(s) chosen by an asset owner and applied by an investment manager should appropriately reflect the stakeholder’s preferences and requirements. The time horizon(s) is an outcome of a robust process rather than a driver of the process. CFA UK understands that we do not live in a world where market prices always reflect fundamental value. Company management can manipulate earnings, capital can be misallocated and risk can be mispriced . However, addressing these issues requires an approach that looks at the structural causes of these faults rather than focussing on the length of an investment’s time horizon.
By improving the ability of company managers, asset owners and investment managers to generate value, the system should encourage efficient capital allocation.
Author:
Sheetal Radia, CFA, supported by CFA UK's Market Integrity and Professionalism Committee.