On the go: The Thinking Ahead Institute has released new open source data that pensions schemes can use to measure investment performance.
The code, developed by the investment research group sponsored by Willis Towers Watson, is based on its research into the separation of short-term and long-term return components of an investment strategy.
Thinking Ahead Institute’s co-head Tim Hodgson argued that previous research has identified “a significant long-term investment premium”, up to 1.5 per cent a year, which “can be harvested and shared with end beneficiaries”.
He said: “The industry has become accustomed to short-term performance measures, which are perpetuated by traditional reporting methods, resulting in many investment mandates being terminated for the wrong reasons and at the wrong time.
“Hopefully, this is about to change, as institutional investors are equipped with new tools to help them think differently while shifting their focus towards asset managers’ decision-making abilities and the fundamental drivers of returns.”
The open source code is freely available and is designed to break down a portfolio’s returns into three components: changes in market sentiment, growth in portfolio fundamentals, and changes in the portfolio’s holdings.
The code aims to allow the evaluation of an investor’s decisions to be based not only on market-value returns, but also changes in the fundamental attributes of the portfolio over time, the research group said.
It hopes that pension schemes that adopt the code can develop more meaningful reporting.
Hodgson added: “In addition to thinking differently, we believe the widespread use of this approach will enable improved conversations, between asset managers and asset owners, about the long-term return drivers of an investment strategy, particularly during periods of underperformance.
“It should broaden the portfolio review discussion away from an exclusive focus on short-term performance towards the quality of underlying decision-making and production of sustainable returns.”
Craig Baker, WTW’s global chief investment officer, noted that the company is already “making use of this methodology to assess equity managers beyond the traditional frameworks and expect to widen that to other asset classes”.
“We have found it to be particularly helpful in understanding what has been driving performance when there has been a divergence in fundamentals and stock price performance in the wider market,” he said.
