Designing an Investment Organization for Long-Term Investing
54 Pages Posted: 23 Oct 2014 Last revised: 19 Mar 2017
Date Written: October 21, 2014
We address how investment management organizations might be built to successfully pursue long-term investing. A variety of recommendations and suggestions are put forward that address four building blocks: organizational; incentives; investment approach; and discretion over trading. A key message is the need to manage the principal-agency issues that occur across multi-layered operations, with the aim of building alignment with investing for the long run. Investment approaches should be focused around the drivers of long-term outcomes, rather than short-term price movements. We highlight the importance of commitment in terms of both funding, and towards those making the investment decisions; but note how commitment is associated with costs and trade-offs. An approach is presented for evaluating performance based on separating out the effects of long-term expected returns, changes in discount rates, and changes in expected long-term cash flows. Our discussions are illuminated by insights and examples drawn from the Future Fund.
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