Discover the benefits of visionary, long-term investing

Long-term investing extends far beyond the realm of day to day returns and their volatility. It’s about ensuring your actions today are made with full consideration on the impact to current and future stakeholders.

Long-term investing extends far beyond the realm of day to day returns and their volatility. It’s about ensuring your actions today are made with full consideration on the impact to current and future stakeholders.

This is not an easy task, given all the news and focus on stock market volatility and current affairs such as geopolitics and inflation. And that makes it a major ongoing challenge faced by intergenerational investors. But in the end, future generations will judge us, not by what we say, but by what we do.

What are intergenerational investors?

An intergenerational investor invests “across generations” for the benefit of stakeholders across multiple “generations”. They typically have an indefinite and infinite timeframe to invest. The aim is to create more money both now and for the future.

Intergenerational investing is commonly associated with university endowments, foundations, sovereign wealth funds and family offices.

As they are focused on the very long term, intergenerational investors have more freedom of choice, which gives rise to the ability and willingness to take more risks and accept smaller short-term failures. And while small short-term failures may not be something all investors are comfortable with, there are advantages to thinking more laterally about very long-term investing, provided the right governance framework is adopted.

When investors can see the size of their pot of money, it can be easy to forget that it’s not a pot for now. It’s a pot for forever. Consistent and persistent overspending will quickly erode the ability for the portfolio to grow over time, increasing the risk that the money will eventually run out.

Long-term investment portfolios

All investors constantly face some degree of market volatility so it’s important to build robust portfolios to capture opportunities, minimise risks and reap the benefits of true diversification.

And there are some differences when you’re constructing a portfolio that’s designed to invest forever.

You need growth in real (after inflation) returns to ensure the portfolio is growing at a rate that it can continue to support future generations’ needs, even while supporting current generations’ needs.
Risk is less about short term volatility and more about the risk of not having enough real growth over time.
Diversification is less about having returns that are marginally less poor than the broader market and more about ensuring your portfolio is robust for future themes/regimes (whether that is higher inflation, how it manages through the energy transition or periods of persistently higher volatility).
There is no need for daily liquidity of the entire portfolio, giving rise to more options for investment, with potentially smoother return patterns.

Meeting short-term spending needs for current generations.
Maintaining/growing their portfolio to provide for future generations.

When it comes to short term risk, intergenerational investors can withstand market volatility and short-term market induced drawdowns from the portfolio, unless they’re so severe and persistent that they reduce the portfolio’s ability to grow over time. Very long-term investing looks at both downside and upside risk to address the following questions.

Am I giving up any gains by being too risk averse in the short term?
What will the potential impact be on future generations if the portfolio doesn’t grow enough – will the money run out?

This typically leads to a greater appetite for riskier investments because not taking on enough risk means the portfolio might not grow enough over time and would therefore not exist into perpetuity for the many future generations to come.

Over time, there have been considerable changes in the type of assets used within very long-term investment portfolios as investors move beyond typical stock and bond portfolios and into more alternative assets. The allocation different organisations make to alternative assets can be materially different between investor types.

Long-term portfolios tend to have:

Less exposure to assets with lower expected returns/lower risk, such as fixed income and cash.
More exposure to growth assets and, less liquid assets such as private equity and debt and private real estate and infrastructure.

Most very long-term investment portfolios allocate more than 75% of their portfolio to growth assets, particularly if they’re looking to distribute around 4% a year as part of their spending plan. While this allocation to growth assets is expected to increase the short-term volatility of returns, it also increases the probability of growing above a real rate of return of 4% over the long term.

Strategies for intergenerational wealth building

When you’re investing forever, the universe of investments you can choose from is very broad. Narrowing this down is a big task.

While more opportunities and possibilities might seem exciting, it comes with a higher probability of failure. The key is to implement clear governance and delegation structures to prevent the broad range from becoming a problem. To decrease the probability of failure you need rules to guide portfolio decision making and help avoid emotional and capital-draining decisions.

When you truly understand your goals, have them clearly outlined and have a plan to stick to them, it’s much easier to see the long-term impact of what you’re doing with your money. And therefore, much easier to know what to do when risks or opportunities arise.

Intergenerational investors do just this. They have clear, mission-driven, timeless goals that are core to their purpose. They consider the future, and what it means to them and their core reason for existence. Rather than targeting a broad spread of uncorrelated assets like investors with shorter time horizons, diversification for intergenerational investors means making sure your assets are on the right side of history.

For example, will inflation be structurally higher over the next decade and if so, what do I need to do to ensure I fulfil my core purpose?

Or does a low-carbon future present any opportunities? What are the risks? And what asset classes are the most important when it comes to tackling the unknowns of climate change?

Key impacts of inflation

Digging deeper into inflation, today’s high inflation environment presents intergenerational investors with a new challenge that many have never had to deal with before. There are two key impacts of inflation that very long-term investors must consider.

Inflation increases the return hurdle required to meet their dual objectives of short-term spending and maintaining the real value of the investment over time.
Inflation affects the amount of spending they require. If things cost more to buy, living expenses increase and they will need to spend more to achieve the same thing.

Adjusting the spending plan across several years to manage rising costs and inflation will impact the growth of a portfolio far more than the strategic asset allocation. Such changes require careful consideration and professional advice.

Conclusions

For intergenerational investors, enduring market volatility with a higher proportion of growth assets, and with a need for spending during market downturns can be challenging.

Intergenerational investing requires a clear purpose and governance framework, so that a plan is in place before events happen. While it is prudent to be prepared for market downturns and unexpected events, short-term headwinds shouldn’t affect the overall mission and spending plans for intergenerational investors.

In the end intergenerational investors are able to tolerate more risk and less liquidity and are there so they can grow a pool of money for future generations whose words of thanks will not be heard.

If you’d like to learn more about intergenerational investing, please reach out to us.

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Discover the benefits of visionary, long-term investing

Long-term investing extends far beyond the realm of day to day returns and their volatility. It’s about ensuring your actions today are made with full consideration on the impact to current and future stakeholders.

What are intergenerational investors?

Long-term investment portfolios

The fundamentals of intergenerational portfolio construction

A delicate balance

Characteristics of a very long-term investment portfolio

Strategies for intergenerational wealth building

Have a clear plan

Be true to your purpose

Key impacts of inflation

Conclusions

Top considerations for endowments and foundations in 2023

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