Jacobs: Policymaking for the Long Term in Advanced Democracies

Abstract”

A range of policy problems – from climate change to pension sustainability to skill shortages – confront governments with intertemporal dilemmas: tradeoffs between maximizing social welfare in the present and taking care of the future. There is, moreover, substantial variation in the degree to which democratic governments are willing to invest in long-term social goods. Surprisingly, the literature on the politics of public policy has paid little explicit attention to timing as a dimension of policy choice, focusing almost exclusively on matters of cross-sectional distribution. This essay develops a framework for explaining intertemporal policy choices in advanced democracies by adapting findings from the literatures on distributive politics, political economy, and political behavior. The article makes a case for analyzing the politics of the long term in two dimensions: as a struggle, at once, over how welfare should be allocated across groups and over how policy effects should be distributed through time.

Available for download here.

Watson, Felli, Wood and Dowdeswell: Unlocking investor interest by reinventing the demand-side

From the Introduction:

The world is becoming smaller, older, more city focused, more cautious and more polarised between rich and poor. And if that is not enough, the climate is changing, food prices will rise, governments are withdrawing from social contracts and economic power is shifting. While innovative social infrastructure is fundamental to vibrant and resilient communities in this changing world, there are too few public resources available to address the infrastructure gap especially in the EU. This is compounded by a degree of uncertainty among public authorities about whether, when and how private investment is the right path to take. There are common challenges and opportunities here for institutional investors and demand-side public authorities.

Good solutions will need, among other things, new thinking and approaches to private sector investing in social infrastructure and associated public service renewal. Putting into play some predictable preconditions are essential for generating investable and resilient social infrastructure projects that are to scale for long-term investing. For institutional investors this is not about using them as shock absorbers against some of these macrotrends. There is a basic need for more informed dialogue and behaviour between Institutions that carry out maturity transformation for savers, intermediaries who act as a conduit for funds, and end-users that place investments in physical and human capital. In short, in a networked and shared economy, investors, intermediaries and end-users need to be more proactive in delivering patient and productive capital. This briefing paper looks at the why and how of the need to reinvent the demand-side as part of this paradigm shift. In particular, a new Trans-European Network for Social Infrastructure and a Pathfinder Programme will help facilitate the required shift.

Available for download here.

Monk & Sharma: Re-Intermediating Investment Management: A Relational Contracting Approach

Abstract:

A growing number of institutional investors are unhappy with the exposures they have to long-term alternative asset classes, such as private equity, infrastructure and real estate. This frustration has little to do with the underlying assets. Rather, it relates to the sub-optimal access points and governance structures that tend to intermediate institutional investors from the assets they are trying to invest in. Put simply, external fund managers enjoy a disproportionate amount of power relative to the value they actually add in these illiquid markets. This paper thus argues that investors may want to re-intermediate their investments in alternative asset classes and work with more aligned, external agents. Drawing upon contract theory, we propose a shift towards the relational contracting method based upon trust, mutual dependency, transparency and co-operation as a more aligned governance mechanism for the long-term. Such a method of governance can be achieved through bilateral arrangements such as co-investment agreements, funds-of-one, or managed accounts. In cases where pooled vehicles, such as the Limited Partnership ‘Fund’ model, are more appropriate (and relational contracting is difficult to implement), more emphasis should be placed on fee transparency and on negotiating robust termination clauses in order to incentivize managers and reduce the power asymmetry between the two parties. Structural barriers to the implementation of relational contracts for investment management are identified and relate to the ‘LP’, ‘GP’ legal short hands used in the industry, which consolidates the power of managers as well as the role of investment consultants as gatekeepers to investment managers.

Available for download here.

Monk, Kearney, Seiger & Donnelly: Energizing the US Resource Innovation Ecosystem

From the Executive Summary:

By 2050, the world population is forecasted to reach 10 billion people, and consumption of natural resources is expected to increase four-fold above current rates. Radical resource innovation – across energy, agriculture, water, and waste – is required to prepare the world for this future. Without it, we risk irreversible climate change, military conflict over resource access, and deepening inequity in the developing world.

Paradoxically, there are no shortages of breakthrough technologies being developed in universities, national labs, and garages that could be as transformative today as the steam turbine in the 19th century or the solar cell in the 20th.  What there is a shortage of, however, is patient, early-stage capital to support the transformation of these projects into lasting, profitable companies. Even growth-stage companies in this space sometimes lack access to project capital to execute first-of-a-kind demonstrations and deployments, and to achieve price competitiveness at commercial scale. In short, preventing a climate catastrophe demands that we create a new investment toolkit that can help bridge the “valleys of death” faced by these companies.

We thus believe that the resource innovation ecosystem could benefit from the creation of a new aligned intermediary (“AI”). The AI, detailed below, is designed to be a uniquely aligned financial services organization whose mission would be to specifically help Long-Term Investors (“LTIs”) – such as pensions, endowments, sovereign funds, family offices, and foundations – identify, screen, assess, and invest in high-potential companies that are producing the most impactful, and indeed profitable, solutions to climate change.

Available for download here.

Mauboussin & Callahan: A Long Look at Short Termism

ASBTRACT:

Short-termism is said to plague all parties in the investment community, including investment managers, companies, and investors. However, it is very difficult to prove.
To assess and evaluate the impact of market short-termism, the right level of analysis is not what individuals say but rather what the stock market does. For many companies, a contraction in time horizon is a proper response to economic reality. Corporate executives and investors who suffer from short-termism are partners in a dance who are attracted to one another based on their characteristics.
The holding period that is relevant in portfolio construction is the time an investor is exposed to an asset class, not the turnover for a particular stock or fund. We provide specific recommendations to deal with the pressures of short-termism for investment managers, companies, and investors.

 

Available for download here.

Cheng, Hameed, Subrahmanyam & Titman: Short-Term Reversals – The Effects of Institutional Exits and Past Returns

ABSTRACT:

Return reversals depend on de facto market making by active informed investors as well as uninformed market makers. Accordingly, we find that reversals are higher following declines in the number of active institutional investors. Price declines over the past quarter, which serve as a proxy for declines in active investors, lead to stronger reversals across the subsequent two months; indeed reversals are concentrated primarily in past quarter losers. We provide evidence that price pressure induced by fire sales in response to past stock price drops cannot fully account for our results. Further, the evidence is consistent with market makers reacting more quickly to changes in the number of informed investors in the more recent period, particularly for large firms.

 

Available for download here.

Ellis: The Rise and Fall of Performance Investing

ABSTRACT:

Performance investing has enjoyed a remarkably long life cycle, but the costs of active investment are so high and the incremental returns so low that, for clients, the money game is no longer a game worth playing. Investors—both institutions and individuals—are increasingly shifting toward indexing. As acceptance of indexing grows, clients and managers have an opportunity to stop focusing on price discovery (which has made our markets so efficient) and refocus on values discovery, whereby investment professionals can help investors achieve good performance by structuring an appropriate, long-term investment program and staying with it.

 

Available for download here.