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Institutional Investors and Long Term Investment

Institutional Investors and Long Term Investment. Juan Yermo Financial Affairs Division Directorate for Financial and Enterprise Affairs. Outline. What do we mean by long-term investing and why does it matter? What are the barriers to and trends in long-term investing?

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Institutional Investors and Long Term Investment

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  1. Institutional Investors and Long Term Investment Juan Yermo Financial Affairs DivisionDirectorate for Financial and Enterprise Affairs

  2. Outline • What do we mean by long-term investing and why does it matter? • What are the barriers to and trends in long-term investing? • What are the potential policy solutions to promote long-term investing? • What is the OECD doing?

  3. I. Long Term Investment Strategies What does long-term investment mean and why does it matter? • “Patient” capital: • Long-term / illiquidity premia, lower turnover, less procyclical investment strategies  higher net returns, greater financial stability • “Engaged” capital: • Active voting policies  better corporate governance • “Productive” capital: • Support for infrastructure development, green growth initiatives, SME finance, etc  sustainable growth

  4. Long-term Investors

  5. Long-term Investments Source: World Economic Forum (2011)

  6. II. Trends & barriers in LT Investing:

  7. Shorter investment holding periods Holding periods in major stock markets Source: OECD (2010)

  8. Growing myopia over future income Short-termism indicator: shareholders discount future cashflows by an additional 6% - “x” parameter in Haldane and Davies (2011) Source: Haldane and Davies (2011)

  9. Trends in pension fund allocation • Declining equity allocations in some countries (e.g. UK, Netherlands) • Less than 1% of their assets in “unlisted” infrastructure, over 2% in hedge funds • Private equity mainly LBO-driven, little venture capital • Growing appeal of ETFs and other liquid investment vehicles

  10. III. Policies to Support LT Investment Reform Regulatory Framework for Institutional Investors • Build expertise – appoint more knowledgeable pension fund trustees • Forster collaborative strategies – pooling to allow for scale investments (share risk and knowledge)/ collaborate to share corporate governance oversight costs • Check prudential regulation – avoid unintended misalignments pushing institutional investors into a short-term focus • Supervisory oversight – investigate firms with high turnover etc.

  11. Policies to Support Long Term Investment Encourage Institutional Investors to be active shareholders • Regulatory support – check no barriers (take over issues etc.)/ practical help (electronic voting) or compulsion (disclose voting policies) / multiple voting rights? • Collaboration and professional services – e.g. ICGN/ PRI initiatives / proxy voting services • Guidance on behaviour expected – Stewardship codes • Supervisory guidance and accountability / disclosure over LTI

  12. Policies to Support Long Term Investment Government support for long-term investments • Supportive tax policy and policies to promote long-term investment – tax policy on debt vs. equity /FDI policies • Government issuance of long-term instruments – long-term inflation linked bonds/ longevity bonds? • Transparent environment for infrastructure – long-term policy (including on environment)/ data collection/ suitable investment vehicles (PPP)/ risk mitigation mechanisms

  13. Policies to Support Long Term Investment Financial education and consumer protection regulation • Appropriate financial consumer projection framework – transparency/ redress mechanisms • Tailored financial education and awareness strategies and programmes – explain benefits of long-term investing • Default mechanisms – life-cycle strategies

  14. IV. What is the OECD doing? Long-term Investment Project • The purpose of this project is to investigate ways to encourage and assist institutional investors (particularly pension funds and insurance companies) to act over longer-term periods. • Drawing on expertise across OECD (Directorate Financial Affairs / Corporate Governance/ Tax/ Environment etc.)

  15. OECD Long-Term Investment project • Monitoring LT Institutional Investors: GPS, GIS data collection • Research papers • Pension Funds and Investment in Infrastructure; • Pension Funds and Green Growth; • Life Insurance & Infrastructure Investment; • The Emerging Market perspective on Institutional Investment in Infrastructure; • Impact of Solvency Regulation and Accounting Standards on Life Insurers’ and Pension Funds’ Investment Strategies; • Institutional Investors and Corporate Governance. • Dissemination through a series of high-level meetings and conferences – bringing government representatives, regulatory community, investors together

  16. Further OECD information www.oecd.org/daf/pensions - private pensions webpage www.oecd.org/daf/fin/wp - OECD Working Paper series on Finance, Insurance and Private Pensions www.oecd.org/finance/lti - OECD long-term investment project webpage

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