Putting long-term investing into context

In the current environment of heightened uncertainty, the market’s attention is directed more than ever towards the short term, be it the latest advance in AI or yet another geopolitical headline. While there is undoubtedly opportunity for investors who can skillfully exploit the associated short-term volatility, we think having a long-term orientated approach has become more valuable in this sentiment-driven market cycle.

Why? Although shorter-term performance can be materially impacted by macroeconomic dynamics, valuation changes and market concentration, we believe that over the long term, share prices are primarily driven by the growth in earnings and shareholder returns generated by the underlying businesses. Our own approach, Global Stewards, seeks to put this belief into practice by investing in companies with an intended holding period of 10 years or more. This is because setting a long investment horizon imposes a higher bar for inclusion. If we aspire to own a business for over 10 years, it must demonstrate sustainably high returns on capital and the stewardship to preserve and grow those returns. That discipline shapes every buy, hold and sell decision we make.

Our approach seeks to align three horizons:

1. the strategic decision-making horizons of the companies we own,
2. the compounding nature of long-term value creation, and
3. the investment goals of our clients.

Even in a world of increasingly rapid change, we think corporate strategy still takes years, not quarters, to come to fruition. Decisions around capital allocation, supply chains, workforce development and decarbonisation rarely show their full impact in the next earnings report. We believe their importance grows as one extends the time horizon. By anchoring our analysis to long-term outcomes, we aim to remove the noise of “short-termism” and focus on what ultimately drives value: durable competitive advantage, strong financial returns and superior stewardship.

A different time horizon

The contrast between our investment horizon and that of the broader market is meaningful. The average holding period for equities has fallen dramatically over the past several decades and is now often measured in months rather than years. In many developed markets, the implied average holding period is estimated at well under a year. Against this backdrop, a 10-year holding ambition is intentionally differentiated. It reflects a belief that sustained value creation, not short-term price momentum, ultimately drives shareholder returns. By focusing on value creation — earnings-per-share or book-value growth plus dividend yield — we seek to ground our expectations in fundamentals rather than market sentiment.

This difference in horizon also shapes differences in investor behaviour. A short holding period encourages a focus on quarterly earnings revisions, macro positioning and momentum. In contrast, a 10-year mindset compels us to assess industry structure, leadership quality, capital allocation discipline and the durability of competitive moats through multiple cycles.

Having longer holding periods also means that there may be greater scope for value creation through engagement and proxy voting, given that enhancing returns in this way may require years of two-way dialogue to drive the necessary incremental change.

The value of active

To be effective, we believe a long-term approach needs to be active. We think this is even more true today given the unsettling combination of heightened headline noise and structural change that we are currently experiencing. It entails thinking carefully about the nature of change: whether it is a cyclical or temporary headwind or a secular deterioration. In the former, we are prepared to lean in, adding to high-quality businesses when volatility creates opportunity. In the latter, we act decisively. If we lose confidence in the sustainability of returns on capital or in the stewardship underpinning them, we will sell our investment in full. In Global Stewards, these disciplined sell decisions have been a source of strength for the strategy, reflecting a willingness to reassess our conviction when facts change.

In our opinion, a long-term holding ambition should be just that — an ambition, not a rigid rule. For instance, even with our own 10-year-or-more orientation, we would expect meaningful turnover over a five-year period. Leadership changes, competitive dynamics, capital allocation missteps or structural industry shifts can alter future expectations to the extent that long-term outcomes are unlikely to be met. Having the discipline to underwrite a company for a decade sharpens entry criteria, but should not, in our view, preclude investors from remaining pragmatic in their implementation as circumstances change.

In periods of greater volatility and uncertainty, we believe active “long-termism” becomes more important. A higher bar for inclusion reduces the temptation to chase momentum or compromise on stewardship. It reinforces the focus on businesses that can reinvest through adversity and adapt strategy without compromising their commitment to all stakeholders. Our approach emphasises this pragmatism. We seek to identify companies that can execute through increasing complexity, make difficult trade-offs across stakeholders, and allocate capital efficiently in pursuit of durable long-term value creation.

With a longer holding period, the role of strong and empowered boards also grows in value. We favour companies where boards go beyond oversight, bringing foresight and fresh perspective to strategic challenges — such as the threats and opportunities presented by the emergence of AI or increasingly precarious global supply lines — and we look for agile decision-making that is anchored by long-term strategic logic.

We believe that combining a genuine long-term mindset with a pragmatic approach can help generate differentiated performance through the cycle as illustrated by our two case studies.

• Case study 1: leaning into market volatility
  This market-leading agricultural machinery manufacturer with a durable competitive moat has evolved meaningfully in recent years, resulting in structurally higher and more resilient margins relative to prior cycles. A key driver of our conviction is the company’s transition towards a more technology-enabled business model, which has driven stronger pricing power, reduced input costs for customers, improved environmental outcomes and ultimately led to a less cyclical earnings profile. In addition, the company has improved operational discipline by aligning production with demand, limiting inventory build and protecting pricing.
  
  While disappointing earnings guidance at the end of 2023 resulted in share price underperformance and a compression in the company’s valuation, our 10-year-plus horizon allowed us to look through this cyclical downturn. In fact, we took advantage of share price weakness to increase our position, making it a larger active weight in the portfolio.
  
  As the cycle progressed, the management team’s proactive production and inventory response to the downturn, which supported continued margin strength, meant that the company exceeded market expectations. The resulting uplift in the share price prompted us to trim the position to a smaller active weight, while maintaining conviction in the long-term investment case.

• Case study 2: navigating AI disruption risk
  This human resources and payroll service provider is currently under market pressure given the potential competition from lower-cost AI tools and the broader threat that AI may pose to employment markets. Having a long-term horizon allows us to look through this negative sentiment and focus on the solidity of the long-term return drivers.
  
  Both in-depth engagement with company management and the latest insights from Wellington’s global industry analysts have allowed us to re-underwrite our investment thesis. Specifically, we still believe that the company enjoys a strong competitive position. Payroll processing is highly regulated and mission critical, with significant penalties for errors, while the provider’s role in handling customer cash before employee payment creates high trust and switching barriers. These advantages support strong customer retention and reinforce its moat.
  
  At the same time, we believe the company is well placed to use its scale, proprietary data and AI capabilities to improve productivity and decision-making internally, while maintaining strong standards on privacy, security and ethics. Finally, we believe the management team is adaptable and proactive in its approach to technological change, which supports the company well for this transition. Consequently, given our strong long-term thesis, we added to our position in the company when its valuation declined.