“TAI research has identified a significant long-term investment premium — up to 1.5% pa — that can be harvested and shared with end beneficiaries,” said
The TAI’s new open-source code, which is available on Github.com, 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. This allows the evaluation of an investor’s decisions to be based not only on market-value returns, but also on changes in the fundamental attributes of the portfolio over time. This is intended to promote a longer-term outlook and to enable an improved dialogue between asset owners and asset managers.
“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. In addition, 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,” said Hodgson.
This initiative to improve transparency and enhance accuracy in reporting in the industry has been long supported by TAI’s membership of institutional investors — especially WTW,
The FRA framework can be applied to all asset classes but, as with any single measurement methodology, it may be more applicable to some mandates than others. Currently, it has been applied to portfolios using company fundamentals, but there is potential to apply it to other characteristics that investors increasingly wish to monitor or manage in their portfolio.
“We are 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. In future, we think this methodology will also be able to support investors who seek to align their portfolios to ESG objectives but are struggling to identify if a portfolio’s decarbonisation is, for instance, due to underlying companies reducing emissions or the divestment of high-emission companies. We believe this framework, and an enhanced version of the tool, could provide much needed clarity into how ESG objectives are being managed and achieved,” said
“S&P Dow Jones Indices welcomes the opportunity to share its insights with the
“We are delighted to have supported TAI in development of this open-sourced FRA framework. The methodology will allow asset owners and managers to better understand the drivers of return and encourage genuine long-term investment. Such investment is critical to the generation of wealth in the economy,” said
Notes to editors
The Thinking Ahead Institute’s Fundamental Return Attribution framework enables the separation of a portfolio’s returns into three main components: 1) Returns arising from changes in market sentiment (multiple return), 2) the growth of the portfolio’s fundamental characteristics (growth return) and 3) the change in those fundamental characteristics due to changes in the portfolio’s holdings (activity return).
Decomposing returns into these three components enables a deeper understanding and assessment of how an investment strategy generates returns. Compared to more traditional attribution methods that focus on explaining returns by the performance of different groupings of securities, this approach considers how the investment process generates returns in aggregate due to the current decisions of the asset manager or its past asset selection decision.
The approach separates out returns arising from changes in short-term market sentiment enabling a longer-term outlook by asset owners and asset managers when evaluating recent performance or setting future return expectations. For more detail read the research paper: Fundamental return attribution — separating returns due to short-term noise from intrinsic portfolio growth.
About the
About WTW
At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance. Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success — and provide perspective that moves you. Learn more at wtwco.com.
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