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Investor timeframes diverge in pandemic
Investor time horizons pulled back slightly while corporate capital allocators took a much longer view during 2020, according to a new study.
The analysis from institutional think-tank, Focusing Capital on the Long Term (FCLTGlobal), found investor time horizons shrank by 2.3 per cent last year as companies pushed out their expected capital return timeframes by over 8 per cent.
In a follow-up to an inaugural report published last year, the FCLTCompass study shows investors and corporates responded in contrary fashion as COVID-19 disrupted economies.
“When faced with the startlingly sudden COVID-19 shutdown of the global economy in just a few short weeks, many companies opted to focus on the long term,” the paper says. “And they did that in the face of debt and public equity holding periods that fell by over 10 percent in the same period, contributing to a widening of the gap – by more than two years – between the time horizons of corporate sources of capital and corporate uses of capital.”
The average holding period of underlying capital funding sources (a proxy for investors) dropped by about five months to just under four years in 2020 while the average investment horizon for corporates rose by a similar length to reach six years.
As the pandemic hit, companies increased spending on research and development to “levels not seen in the past two decades”, the FCLTCompass study says, also lifting capital expenditure.
“Investors’ response to economic and market uncertainty was quite different. At a global scale, investors’ time horizons shortened. For investors, the shortening horizons in fixed income and public equities obscure the quite different reactions of savers around the world over the past year. Some favored cash and equities, while others pulled money from the markets and prioritized more tangible real estate investments as a safe haven,” the report says.
However, the study says the shrinking investor timeframe should reverse once the pandemic recedes and global markets settle.
“Many of the meaningful shifts we see in allocations and investment time horizons are likely due to market volatility as a result of the pandemic, and the associated changes in market valuations, rather than a true change in strategy,” the report says. “Unprecedented government intervention in reaction to the global economic shock was a key factor in this year’s data. How that intervention plays out over time will have important long-term implications for the investment horizons of capital market participants.”
The study, which included NZ for the first time along with six other new jurisdictions, found investment time horizon adjustments in 2020 varied considerably between countries.
“Nations that had historically been among those with the longest investment time horizons, such as the UK and Canada, experienced some of the largest contractions in their horizons, while the flight to quality assets in other markets, such as New Zealand, lengthened investment horizons,” the report says.
The FCLTCompass data shows NZ had one of the shortest average investment timeframes of 4.88 years, better only than Japan (3.94 years).
Furthermore, the FCLT analysis found a large gap between theory and practice among sovereign wealth funds, which in aggregate had the longest intended investment timeframe (20 years) but the shortest actual investing horizon.
The report suggests sovereign wealth funds accumulated large cash reserves early in COVID crisis, later redeploying much of the dry powder in equities.
In keeping with the counter-intuitive affect of the pandemic on financial assets, the FCLTCompass study also found household wealth spiked higher, if lopsidedly, during 2020.
“Household wealth grew by 9.1 percent from 2019 to 2020, but the growth in savings was not evenly distributed and skewed toward wealthier households,” the report says.
Sarah Keohane Williamson, FCLTGlobal chief, said the study highlights the overarching trend of “divergence” across the world.
“We’re seeing that, in the face of volatility, companies are committing to the long term, while investors appear headed in the opposite direction,” Williamson said. “The data will be critical to closing that gap over time.”
The FCLTCompass report relied on information from several sources including member organisations, the International Forum of Sovereign Wealth Funds and the Australian-founded firm, CoreData Research Services.
Launched in 2011 on the back of research paper by McKinsey&Company, FCLT members include large corporates and institutional investors dedicated to aligning capital allocation timeframes to long-term goals.
