When this was written the result of the General Election was not known. Regardless of the result, it has got us thinking about something that we mentioned in the immediate aftermath of the 2008 Global Financial Crisis and which appears to remain a big problem in Society today – short termism. 
Back in 2008/9 we suggested that the democratic system itself would make it a lot harder to recover from the mire in which the world found itself, simply because the remedies would take longer than most elected governments needed to put things right.
The electorate would not give politicians the time, if indeed they had the inclination, because any government only has the first two years of its’ elected term to carry out the harder reforms that would be generally unpopular.
Some of these reforms would lose votes for the longer term in any event and thus continuation of policy (Left, Right or Centre) becomes harder to achieve. But how else is short termism affecting us?
Carpetbagging
Remember carpetbagging?
It was every saver’s favourite pastime at the start of the last decade as we all played some form of Building Society bingo by opening accounts with the various societies in order to bag the shares when they privatised and turned into banks.
Long standing allegiances were broken in search of a quick 250 quid or so when free shares were dished out. Those that weren’t cashed in immediately were held in the hopes that a few more pounds would be made from the housing boom that followed.
The “new” banks were urged by their shareholders to keep up with the pacesetters in the mortgage market and offer more and more outrageous loans in order to keep the share price bubbling. Nationwide Building Society refused to enter this game much to the disgruntlement of many of their new account holders.
The Nationwide remains strong today, because they took the long term view. Those that entered into the dash to lend to appease new shareholders are all gone or rescued – Bradford & Bingley, Alliance and Leicester, Woolwich, Northern Rock, Halifax, Abbey National – to name a few. How much are the free shares worth today?
They withered and died as the financial crisis hit. Short termism in action.
Where is short-termism in evidence today?
So where is short termism in evidence today? It’s all around us.
The world of football has long been built around results, but the demands for ill-conceived success have led to a ridiculous turnover of managers. A manager is now “under pressure” if they lose three games in a row.
Sadly, it is not just the Boards that show no patience; the fans are even worse. For some reason most football fans expect immediate and constant success from their team, demanding that other people’s money be thrown at the side and demanding change if victories don’t follow.
Simon Jordan, when chairman of Crystal Palace, observed, “if I built a 55,000 all-seater stadium, bought Lionel Messi and we won the league, they’d [the fans] still complain about the hot dogs.”
In wider society, we all saw how credit cards and housing equity were used as a primary or secondary income to fuel the short term demands of the consumer. They wanted it now, with scant regard for how this may affect the future.
We are seeing a similar thing today as investment managers.
The six-monthly statement
It is interesting to see how much Woodford Investments raised in their recent fund launch through their Patient Capital Trust.
£800 million of new money has gone into the trust and a clue lies in its’ title as to what it aims to do. It will follow a long term investment strategy in providing capital to young projects coming out of Oxford University and similar, specifically in contrast to the shorter term capital that is raised through a number of Venture Capital Trusts in search of a 3 to 5 year exit.
We wonder how many of the initial investors in the new trust will still be there in three to five years’ time if the share price hasn’t behaved as the may have hoped. We would wager that some investors have focussed only upon who is running it and have missed the aim of the trust entirely.
Performance of manager versus peer group composite
Source: FE Analytics
We may of course be wrong, but our scepticism arises from our own experience as investment managers.
Now, it is quite right that investors see how their capital is being used and how it is performing, so we have no argument with the notion of a six-monthly client statement. However, what we have noticed is that clients react far quicker to these than they used to when they received just an annual statement from their insurance company.
Their thanks is appreciated when things have gone well – as with the last six months – but it is noticeable how edgy they are if the six monthly figures show little or no growth, or worse still a slight loss.
One poor statement is generally acceptable. Two causes consternation. A third, and they’d be off.
In a world in which everyone talks about the long term nature of investment and where the regulator quite rightly cautions against using short term results in marketing material, the reality is much like the football manager who comes under pressure for short term disappointments – which naturally tempts the investment manager to behave in the very short term nature that is generally frowned upon.
We are fortunate here in that most of our clients understand that, if they stick with us through a disappointing period, the longer term results are more than satisfactory (which is helped by the fact the managers have their own, their families’, their colleagues’ and their friends’ money in their funds too) but other firms may not offer their managers the same kind of support and framework within which to operate.
And this short termism is about to encounter a completely new, and dangerous, arena.
A pension is the definitive long-term investment, right? Yeah, right
The new style of short termism that is about to be unleashed is that of pension flexibility.
Since 6 April the public has been becoming gradually aware that they can get their hands on their pension fund now. As a firm, we had one or two clients lined up wanting to take their funds immediately, regardless of the potential consequences of doing so.
We’ve seen this number grow, and I’ve been the recipient of a mailshot from a firm offering to “unlock my pension” for me. No doubt, these offers will become more commonplace from unscrupulous firms out to make a quick buck before, no doubt, disappearing in a cloud of investor misery and retrospective regulatory action.
Some of the requests that we’ve received include needing money for a wedding, needing money for car repairs, needing money for a holiday, needing money for a deposit on a buy to let property, and needing money to clear one of the credit card debts that we mentioned earlier.
All of these are short term fixes funded by what should be a long term savings’ pot. We’d argue, the definitive long term savings’ pot.
The idea of allowing people access to, and responsibility for, their own financial affairs is one that we generally applaud, but in this short term society in which we live, will it turn out to be yet another way of destroying the longer term benefits that we are trying to build?
Quite what the answer is, we don’t know.
One thing is for sure though. The headlong rush into short term gratification is not helping politicians, business leaders, fund managers, football managers, investors and, ultimately, the general public themselves, achieve anything like the stability that leads to longer term success and peace of mind.
But we’ve gone on about this for too long already. You’ve probably lost me at the second line of this piece and moved on to something far more gratifying.
Andy Merricks is head of investments at Skerritts Wealth Management. The views expressed above are his own and should not be taken as investment advice.