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What are the features of long-term investors ?

Long-term investors are public or private investors who share at least the following features : long-term investment horizon and balance sheet with no liability obligations or obligations far in the future.

What are the various categories of long-term investors ?

The first category covers investors who in theory have low or no liability obligations.

They are only required to maximize the value of their investments along the lines of sovereign funds and endowment funds over periods longer than an economic cycle. Some economists occasionally call them permanent funds. For a long time they used to invest primarily in secure investments largely consisting of US government bonds. However, driven by a desire to improve their risk/return ratio on their asset allocations they have now diversified their portfolios by including higher risk assets such as equities.

A second category face liabilities with specific timeframes : these are special reserve funds. From the outset, these investors have their own resources which in principle are secure during the entire investment period. The performance of these investors is measured over the long term rather than on an annual basis and they can easily hold positions including during market downturns.

The final category includes investors who face major contractual liabilities, such as pension funds or insurance companies. These investors will tend to reduce the weighting of equities in their asset allocations in future years to comply with accounting requirements - e.g. mark-to-market asset valuations in accordance with IFRS - and regulatory requirements - e.g. Solvency II directive which measures a company’s solvency on a short-term basis while liabilities have a much longer term. The lower the level of equity - e.g. private medical insurance companies, the stronger the trend will be to reduce the weighting of equities.