COUNTERPOINT: Why Long-Term Investing Can Be Dangerous

Posted on 05/21/2015

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Personally, I agree that, in general, large sovereign funds and pensions should invest for the long-term. There are scores of reasons why and thousands of papers produced by asset managers, think tanks and professors who believe so. Nearly every institutional investor with over US$ 100 billion in assets subscribes to the “long-term investor” philosophy. I also understand the issues with reinvestment risk as well as the ways to combat it like identifying intergenerational assets for the long-haul to prevent the risk of not finding another suitable investment that could give a similar risk-return profile.

Today, however, I feel like stirring the pot.

What are some risks to long-term investing?

A major risk that I see is that sometimes an investment could fail in producing the big expected payoff as forecasted. Will the Canary Wharf deal be a positive in the long-run for the Qatar Investment Authority (QIA) given the price paid and resources allocated? Incorrect expectations based on a shaky premise can lead to money being stuck in an underperforming asset (this is especially the case with sizable illiquid investments).

But institutional investors also need to examine some of the glaring examples of lousy deals where money has been tied up too long in non-performing, illiquid assets and the opportunity costs associated with these types of bets.

Obsolescence

There has been a recent spat of deals in which sovereign wealth funds like Singapore’s GIC or a large Canadian pension like CPPIB have acquired significant positions in technology companies. Tech companies can go in and out of style. Rarely, tech companies get to the status of Google, IBM or Oracle. In April 2015, CPPIB and European private equity firm Permira, through its funds, signed a deal to acquire Redwood City-based Informatica Corporation, a provider of enterprise data integration software and services, for approximately US$ 5.3 billion. Insiders perceive vast potential for Informatica, billion dollar opportunities in four market areas such as cloud, big data, master data management and data security. However, there are business risks that a startup or resource-rich competitor could develop a technology or process that could severely impair Informatica’s revenues. One industry to watch for is cloud storage, as firms like Dropbox and Amazon are in a brutally competitive environment.

Political Risk in Infrastructure

Case in point, the Abu Dhabi Investment Authority (ADIA), CPPIB, Allianz Capital Partners and others own Solveig Gas Norway AS, the second-biggest owner of Norway’s massive gas pipeline network. The investor group is in the center of a lawsuit against the government of Norway to reverse the unexpected deep tariff cut approved by Norway’s previous administration, led by former Norwegian Prime Minister Jens Stoltenberg. Why do these institutional investors care about a tariff reduction? The current tariff will lower income by almost US$ 7 billion for the investor group.

Pursuing high returns in potentially-volatile countries can be dangerous. More than five years ago, institutional investors in the West were plowing money into Russia. Even the US$ 300 billion plus California Public Employees’ Retirement System (CalPERS) formed a joint venture with real estate firm Hines in March 2013 to invest in Class A logistics and retail assets in Russia. The fund (Hines CalPERS Russia Long Term Hold Fund) had initial equity commitments of US$ 493 million. Today, the West has issued sanctions in Russia, while the rouble crashes over fallen oil prices and sanctions. Imagine, if a large Western pension or sovereign fund invested in a mega piece of infrastructure that had a 20-year investment horizon…

Clearly the benefits of a long term horizon are profuse and have been well documented. But institutional investors also need to examine some of the glaring examples of lousy deals where money has been tied up too long in non-performing, illiquid assets and the opportunity costs associated with these types of bets.

Elephantine asset owners are uniquely organized to be opportunistic with their allocations, and in certain instances sticking too closely to the “long-term” dogma can have negative long-term results on an institutional portfolio.

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
www.swfinstitute.org

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