Investment short-termism at pandemic levels
"Short-termism" is at pandemic levels within the financial markets, Hyperion Asset Management has warned.
The focus on achieving short-term earnings per share (EPS) and dividend per share (DPS) comes at the expense of long-term growth, Hyperion chief executive Dr Manny Pohl said at the Portfolio Construction Forum's 2011 Conference in Sydney.
Dr Pohl presented a white paper titled, "The Economic Costs of Excessive Short-Termism", written by Hyperion's chief investment officer, Mark Arnold, and portfolio manager/analyst, Jason Orthman. As well as its call for advisers and managers to re-think their obsession with short-term earnings, the paper also cautions fund managers about the dangers of "index hugging", and counsels superfund trustees and individual investors not to base their decision to hire and fire funds managers on short-term investment performance.
According to the due diligence paper, management were overusing financial leverage during strong economic conditions, were underspending on essential research and development, and were deferring long-term capital investments because of a likely short-term negative impact on earnings. Dr Pohl said this happens because a chief executive's position is arguably under threat after two years of underperformance.
One of the key problems of short-sightedness is that companies raise debt in strong markets, but are duty-bound to the debt providers in times of economic stress. In a depressed market, debt holders act to reduce their loan exposure due to the higher probability of default, Dr Pohl said.
A common way to reduce this risk is to force business owners to raise additional equity. However, the cost of this new equity can be extremely high because it is normally raised at depressed prices. A reduction of long-term shareholder value results, Dr Pohl said, and the dilution to existing shareholders can be serious.
According to Hyperion, active fund managers are preoccupied with maximising their funds under management capacity, and they achieve this by hugging benchmarks. This approach values profitability and salesmanship at the expense of trusteeship, Dr Pohl said. Furthermore, the short tenures of fund managers make it difficult to focus on five and 10 year returns.
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