Finance loses sight of role

This is my latest comment from Fund Strategy.

Much as I hate Manchester United I have to concede they have done at least one thing right. Taking a long-termist attitude towards their manager has helped them achieve considerable success. It is easily forgotten that it took Alex Ferguson more than three years before he won his first trophy with the club.

The trend in the financial world, as in football and business, is in the opposite direction. The overwhelming emphasis is on meeting short-term targets. It is like starting a marathon by sprinting the first 100 metres.

The pervasiveness of short-termism in finance suggests it is deeply embedded. It runs over a long time period, in many countries and over many indicators. One of the most striking is the fall in the average holding period for American equities from 60 months in 1973 to six months in 2009.

Such a dramatic shortening of time horizons cannot be explained by attitudes alone. Something must be pushing market participants to be so short-sighted.

The key underlying factor is the change in the role of financial markets and institutions. Rather than acting as a medium for companies to raise capital they have become focused on shifting assets between market participants.

More recently the use of the financial markets as a way of trading risks has compounded this trend. In effect financial instruments have becomes ways of transferring risks from one party to another.

Finance has lost contact with its original role in relation to the real economy – and with reality itself.