Institutional Investors and Long
Term Investment
Juan Yermo
Financial Affairs Division
Directorate for Financial and Enterprise Affairs
Outline
I. What do we mean by long-term investing and
why does it matter?
II. What are the barriers to and trends in longterm investing?
III. What are the potential policy solutions to
promote long-term investing?
IV. What is the OECD doing?
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I. Long Term Investment Strategies
What does long-term investment mean and why does it matter?
• “Patient” capital:
– Long-term / illiquidity premia, lower turnover, less
procyclical investment strategies  higher net
returns, greater financial stability
• “Engaged” capital:
– Active voting policies  better corporate governance
• “Productive” capital:
– Support for infrastructure development, green growth
initiatives, SME finance, etc  sustainable growth
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Long-term Investors
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Long-term Investments
Source: World Economic Forum (2011)
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II. Trends & barriers in LT Investing:
Risk
transfer to
households
Valuation
and
regulatory
effects
Governance
and
investment
incentives
Shorttermism
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Shorter investment holding periods
Holding periods in major stock markets
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Source: OECD (2010)
Growing myopia over future income
Short-termism indicator: shareholders
discount future cashflows by an additional 6% “x” parameter in Haldane and Davies (2011)
Source: Haldane and Davies (2011)
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Trends in pension fund allocation
• Declining equity allocations in some countries
(e.g. UK, Netherlands)
• Less than 1% of their assets in “unlisted”
infrastructure, over 2% in hedge funds
• Private equity mainly LBO-driven, little venture
capital
• Growing appeal of ETFs and other liquid
investment vehicles
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III. Policies to Support LT Investment
Reform Regulatory Framework for Institutional Investors
• Build expertise – appoint more knowledgeable
pension fund trustees
• Forster collaborative strategies – pooling to
allow for scale investments (share risk and
knowledge)/ collaborate to share corporate
governance oversight costs
• Check prudential regulation – avoid unintended
misalignments pushing institutional investors
into a short-term focus
• Supervisory oversight – investigate firms with
high turnover etc.
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Policies to Support Long Term Investment
Encourage Institutional Investors to be active shareholders
• Regulatory support – check no barriers (take
over issues etc.)/ practical help (electronic
voting) or compulsion (disclose voting policies) /
multiple voting rights?
• Collaboration and professional services – e.g.
ICGN/ PRI initiatives / proxy voting services
• Guidance on behaviour expected – Stewardship
codes
• Supervisory guidance and accountability /
disclosure over LTI
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Policies to Support Long Term Investment
Government support for long-term investments
• Supportive tax policy and policies to promote
long-term investment – tax policy on debt vs.
equity /FDI policies
• Government issuance of long-term instruments
– long-term inflation linked bonds/ longevity
bonds?
• Transparent environment for infrastructure –
long-term policy (including on environment)/
data collection/ suitable investment vehicles
(PPP)/ risk mitigation mechanisms
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Policies to Support Long Term Investment
Financial education and consumer protection regulation
• Appropriate financial consumer projection
framework – transparency/ redress mechanisms
• Tailored financial education and awareness
strategies and programmes – explain benefits of
long-term investing
• Default mechanisms – life-cycle strategies
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IV. What is the OECD doing?
Long-term Investment Project
•
The purpose of this project is to investigate ways to encourage and assist
institutional investors (particularly pension funds and insurance
companies) to act over longer-term periods.
•
Drawing on expertise across OECD (Directorate Financial Affairs /
Corporate Governance/ Tax/ Environment etc.)
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OECD Long-Term Investment project
– Monitoring LT Institutional Investors: GPS, GIS data collection
– Research papers
• Pension Funds and Investment in Infrastructure;
• Pension Funds and Green Growth;
• Life Insurance & Infrastructure Investment;
• The Emerging Market perspective on Institutional
Investment in Infrastructure;
• Impact of Solvency Regulation and Accounting Standards on
Life Insurers’ and Pension Funds’ Investment Strategies;
• Institutional Investors and Corporate Governance.
– Dissemination through a series of high-level meetings and
conferences – bringing government representatives, regulatory
community, investors together
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Further OECD information
www.oecd.org/daf/pensions - private pensions webpage
www.oecd.org/daf/fin/wp - OECD Working Paper series on Finance,
Insurance and Private Pensions
www.oecd.org/finance/lti - OECD long-term investment project
webpage
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