Finance industry short-termism slammed

David Gonski, chairman of the Future Fund, has slammed the finance industry for the focus on short term results, and warned that Australia was falling behind Asian counterparts.

Mr Gonski has told the Australian Financial Review (AFR) that it was unhealthy for the financial sector to focus on monthly and quarterly results. He suggested that Asian countries were focused on investing for the long-term (Fools, with a capital ‘F’), despite the fact it may sometimes result in lower short-term results.

Many fund managers report their performance on a monthly and quarterly basis, with a good performance usually resulting in fund inflows, leading to higher management fees, and likely, nice bonuses for said fund managers. Bad short-term results tend to do the opposite, with fund outflows and lower fees.

The issue for fund managers is that most participants in the finance industry are geared up for monthly and quarterly ‘performance’ reviews. That has flowed through to investors who now expect to see their fund beat the market over both the short and long term. In the superannuation industry, the focus should firmly be on the long-term, and by that I don’t mean one, three or five years.

The AFR also reports that Brad Fox, chief executive of the Association of Financial Advisers has called for an alignment between the investment objectives and the pay for the person investing. “Is it appropriate that an individual is earning bonuses based on short-term results if the investment is positioned as a long-term one?”, he said.

As an example, Perpetual Limited (ASX:PPT) has several investment funds where the timeframe is specified as 7 years or longer, with many having a 5 year or longer timeframe. However, many of the funds report their monthly and quarterly performance and it’s unlikely that the respective funds’ managers are paid bonuses based on their 5 or 7 year performance.

Even Platinum Asset Management (ASX:PTM) is not immune, with its Platinum International Fund reporting monthly and quarterly performance, despite a long-term focus. And I imagine the same goes for other listed fund managers BT Investment Management (ASX:BTT) and K2 Asset Management (ASX:KAM).

Foolish takeaway

Most employees have a working life of 40 plus years plus many years in retirement, so a quarterly or monthly focus is not appropriate. Foolish investors should take the same approach, with one eye on the end goal, rather than monthly or quarterly movements in their portfolios.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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