Views on improving the integrity of global capital markets
14 January 2014

Wanted: Asian Institutional Investors to Curb Short-Termism

Posted In: Short-termism

Investor relations professionals pride themselves on managing market expectations about their companies. That job has become a lot tougher in these volatile times as some investors demand greater clarity and more frequent updates on how market changes impact their companies’ financials. Short-term investment time horizons — the norm in the independent management world — make the problem worse.

Strategically, it would be in the interest of most listed companies in Asia to have long-term investors on their registers. But attracting investors who don’t flee at the slightest market tremor can be challenging. Most Asian stock exchanges are dominated by retail investors who are generally quite fickle. The marginal investor tends to be foreign institutions who can view Asia as an afterthought in their portfolios rather than the main story — this, too, makes them a fair-weather friend.

Asian equities markets are structurally more volatile because there’s less floated stock as a percentage of market capitalization. Some Western institutional investors quickly disinvest in Asia when trouble hits their home markets — drying up liquidity and creating a disproportionately disruptive turbulence in their wake. This has been the pattern for decades, and there’s little sign of change.

If the investor profile of Asia’s equity markets stays the same, it will hinder the development of Asia’s capital markets, and consequently, inhibit economic growth.

An answer to this problem of short-termism is the growing importance and size of Asian institutional investors. Domestic institutions have traditionally invested in fixed income and overseas assets, though asset allocation has adjusted recently in response to low yields and the inexorable economic rise of Asia. Eventually this will produce a more stable, longer time horizon and investor base. Raising the quality of financial reporting in Asia is also another way of curbing short-termism. Ongoing accounting scandals involving Chinese firms and the general lack of corporate transparency in China are considerable deterrents to longer-term investing — or indeed to any investing!

I was recently part of a panel discussion organized by IR Magazine in which my fellow panelists, including an analyst from a brokerage firm and an investor relations executive from a Fortune 500 company, underscored the need for trustworthy company financial information. The panelists also endorsed the view that gaming the market by under-promising and over-delivering (the recent trend) will work against companies in the long run as investors and analysts eventually lose trust in the company’s guidance numbers.

New Approaches

The quality of long-term investors in Asia is mostly good. Seasoned investors are used to the volatility of Asia and look through short-term cycles. The question is how can we get more of them?

The good news is that the buy-side is changing. Power is shifting toward large and powerful fiduciary asset owners such as sovereign wealth funds (such as China’s State Administration of Foreign Exchange and the China Investment Corporation, Singapore’s GIC Asset Management, and Temasek), pensions, insurance companies, and endowments that have a longer investment horizon and more activist stance.

This emerging landscape will demand new approaches from investor relations professionals. They will need to position their company by asking what type of investors they have on their register and what are the needs of those investors. For example, sovereign wealth funds are beginning to look beyond financial numbers and into the softer side of the business, such as ESG (environmental, social, and governance) policies.

These investors will be harder to please, but they’ll likely stick with companies that they think are doing right. Companies with a long-term value-creation model can expect to attract long-term investors and benefit from a steadier source of capital for future growth and a less volatile market price. The question for investor relations professionals is will it be your company?

We would like to hear your views on this issue.

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About the Author(s)
Paul Smith, CFA

Paul Smith, CFA, is the founder of SustainFinance and the former president and CEO of CFA Institute. He has more than 25 years of relevant financial services leadership experience in many aspects of the investment management industry.

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