Boards and executives of long-term funds, such as pension plans, sovereign wealth funds, and endowments, have a challenging problem. They need to manage those portfolios to meet their long-term purpose, which may be decades or more into the future. Yet no fund has the luxury of looking only to that long-term time horizon. Each must also meet expectations in the near term in order to continue in its role and with its investment strategy.
This challenge of meeting both long-term obligations and short-term expectations means that even the longest-term investor must manage across multiple time horizons. This necessity is often at odds with most risk processes, which have been developed to address short-term risks or to target long-term return—but not both.
FCLTGlobal, with input from its members, which include many of the world’s leading asset owners and investors, has raised this challenge as central to their ability to take advantage of their long time horizons. Too often, funds carefully set up long-term investment strategies, with a focus on meeting their ultimate purpose, only to shift to a short-term strategy in response to stressful market conditions.
Given our mission of focusing capital on the long term, we see improving risk management across multiple time horizons as one of the key levers for extending investment time frames, and ultimately one of the ways in which fund boards and executives can deliver value to their beneficiaries. This paper addresses the challenge of managing multiple-horizon portfolios by outlining why such management is important, considering the barriers and hurdles, and then proposing a range of tools that funds could use, as appropriate to their situation.
While investors need long-term investment strategies to meet their long-term obligations, their investments must also perform sufficiently during interim periods to maintain constituents’ support. Balancing long-term objectives with interim performance is critical. Current risk behaviors, measurements, and communications typically do not fully address the challenge of managing portfolios across multiple horizons.
To tackle this issue, FCLTGlobal, with input from its members, has developed practical tools for managing multi-horizon risks, including a Risk Conversation Guide for boards and staff to move the issues of managing multiple-horizon portfolios onto the board meeting agenda.