Season Investments

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Q&A: Do institutional investors have a longer investment horizon than others?

Posted on April 24, 2012

As an initial disclaimer, we need to define what "investing with a long time horizon" means to us. Many think that to have a long time horizon means that one espouses to the classic buy-and-hold, efficient frontier style of investing. For us, this is not the case. Our definition of investing for the long-term is being willing to deviate from the buy-and-hold mantra in order to protect capital and compound higher rates of return over full market cycles. Starting from that frame of reference, it is hard to answer this question in the scope of broad classifications such as institutional and non-institutional or "retail" investors. We think the biggest differentiator comes down to whose money is being invested.

As an example, pension funds invest in order to offset liabilites that are multiple decades into the future. In addition, the beneficiaries of the invested funds have no say or control over how the money is being invested. Therefore, a pension fund doesn't need to worry about their client's short-term investment expectations. The same could be true for an individual investor who is running their own money. The only person they have to answer to at the end of the day is themselves, which affords them the opportunity to be as long-term or short-term focused as they would like to be. 

On the other hand, a hedge fund, mutual fund, or investment management firm has to manage shorter term client expectations in addition to their fiduciary responsibility of managing the client's capital. In other words, these "institutional investors" run the risk of being out of business if they stray to far from their client's short-term expectations. 

This paradox was unpacked beautifully by the infamous hedge fund manager and value investor Jeremy Grantham in his most recent quarterly letter, which we highly recommend reading. Grantham lived through this problem first hand in the late 90's as he sold out of all overpriced technology stocks and lost half of his clients in the process. To quote another well know value investor Howard Marks, "Sometimes being early is indistinguishable from being wrong."

At the end of the day, anyone who is responsible for managing other people's money must continually educate their client base on what they are doing and why so that the investor can be on the same page as the manager. In doing so, professional investors can afford themselves a longer term investment horizon.

Season Investments, LLC
info@seasoninvestments.com
(p) 719.528.8400
(f) 719.352.3617

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We want Transparency to be one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward manner about what we are doing in their portfolios and why. Regular Macro Updates will address our economic and capital market viewpoints and discuss top-down portfolio positioning. Also watch for Micro Updates which convey our reasoning behind specific investments. Lastly, we do a series of Q&A posts which address questions we believe will benefit our broad investment community.

This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.