Behaving Like an Owner: Plugging Investment Chain Leakages

Abstract

The theme of investing for the long term through engaged ownership is gaining profile. This article explores the implications of “behaving like an owner” and estimates its financial benefits. We follow the journey of $100 over 20 years under four different “leakage” scenarios. Downstream leakages are active management fees, manager transition costs, and excessive trading; upstream leakages are unwarranted M&A activity and misaligned incentive structures. We find that fixing these leakages can increase the size of savings pots by as much as 25% over a 20-year accumulation period. We also address the behavioral question, “If this is so self-evident, then why do presumably rational investors keep doing these irrational things?” We close with some thoughts on the behavioral changes needed to get institutional investors behaving as owners.

Keywords: Institutional Investors, Investment Costs, Investment Process, Long-Term Investing, Pension Funds, Short-Termism