Distant threats for investors
Long-term returns are achieved when the welfare of beneficiaries is assured. This is inextricably linked to economic growth and development that underpins high levels of employment at earnings which provide decent living standards.
In May 2016 a South African court delivered a landmark ruling allowing a class action against gold mining companies. The court’s decision allows close to 1m gold mine labourers who contracted silicosis and tuberculosis – both fatal lung diseases – to seek damages.
The claims are likely to stretch back more than 50 years to the high point of gold mining in the region in the 1960s and 1970s. At that time the industry employed close to 1m nationals of South Africa, Lesotho, Malawi, Mozambique, Swaziland and neighbouring countries. Some of the affected companies no longer own or operate gold mines. If damages are granted, the industry would be liable for hundreds of millions of dollars.
Although the shares in these companies did not show a marked response to the court’s decision, shareholders in these companies will be affected by reduced returns in both income and capital gains. Past shareholders have enjoyed better returns as past share prices and income did not fully anticipate and reflect potential costs associated with external issues like lung disease. Up to 500,000 mineworkers have paid with their health.
The long-term returns that institutional investors seek enable them to meet their obligations both when they are due and for the duration that they need to be met. A secondary requirement is to maintain the purchasing power of the payments. Likewise, returns can be used to fund growth-enhancing policies to support welfare. This is inextricably linked to economic growth and development that underpin high levels of employment at earnings which provide decent living standards.
Linking national development and long-term returns
The nature, size and horizon of investable assets inform what long-term returns are desirable and possible. The bigger the funds and the longer the investment time horizon, the higher the obligation to meet these criteria.
Uncertainty and diversity of choices are the essence of the implied risk in investments. It is therefore important to appreciate that investment returns are always a function of investment risk associated with asset classes, duration and location. These are susceptible to short-term volatility. However, the primary risk for long-term investors is a permanent loss in the value of their investments.
Long-term returns presuppose a long-term investment horizon. This is possible when investors have limited liquidity needs and are focused on achieving returns to meet a long-term objective such as income generation or replacement for individuals, and beneficiaries of pension funds. The source of long-term returns is productive investment in industry, infrastructure, and public goods and services that lead to sustainable growth and development. It is reasonable to assume earnings growth, interest and capital redemption will keep pace with the real economy and national development.
The link between long-term returns and national development is best illustrated by the performance of equity investments. Economic growth will be constrained unless businesses are profitable. Earnings, the source of value for equity investments, are therefore both the result of positive economic activity and contribute to the development of diversified portfolios over different asset classes and jurisdictions. Institutional investors must overcome the immediacy and appeal of short-term returns, though they dominate the discourse to which investors are exposed.
Institutional investors with little or no need for short-term liquidity can make use of ‘patient’ capital that allows them to invest in long-term assets which provide sustainable returns. But, like short-term investors, they cannot ignore the possibility of negative, and occasionally distant, external threats. ▪