The Thinking Ahead Institute targets the new investment sector

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ARLINGTON, Va., June 14, 2022 (GLOBE NEWSWIRE) — The Thinking Ahead Institute (TAI), a WTW-sponsored investment research and innovation membership group, has released open source computer code to enable institutional investors to think differently about investment performance and how to better report on it. The code is an implementation of TAI’s Fundamental Return Attribution Framework (FRA), which stems from its extensive research into separating the short- and long-term return components of an investment strategy. The code is designed to make it easy for investment organizations to apply this framework to their own portfolios and develop more meaningful reporting tools that, if widely adopted by the industry, would transform it.

“TAI’s research has identified a significant long-term investment premium – up to 1.5% per year – that can be harvested and shared with end beneficiaries,” said Tim Hodgson, co-director of TAI. “However, the industry has grown accustomed to short-term performance metrics, which are perpetuated by traditional reporting methods, resulting in many investment mandates being terminated for the wrong reasons at the wrong time. this is about to change as institutional investors are equipped with new tools to help them think differently while focusing on the decision-making capabilities of asset managers and the fundamental drivers of returns.

The new open-source code of the TAI, available on Github.com, is designed to break down portfolio returns into three components: changes in market sentiment, growth in portfolio fundamentals, and changes in portfolio holdings. . This allows an investor’s decisions to be evaluated not only on market value returns, but also on changes in fundamental portfolio attributes over time. This aims to promote a longer-term perspective and enable better dialogue between asset owners and asset managers.

“We believe that the widespread use of this approach will enhance conversations between asset managers and asset owners about the long-term return drivers of an investment strategy, particularly during periods Furthermore, it should broaden the portfolio review discussion away from an exclusive focus on short-term performance towards the quality of underlying decision-making and the production of sustainable returns” , said Hodgson.

This initiative to improve transparency and accuracy of reporting in the industry has long been supported by TAI’s institutional investor members – particularly WTW, Baillie Gifford, MFS and S&P Dow Jones Indices – who have helped develop and testing the framework and methodology.

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 it is possible to apply it to other characteristics that investors increasingly want to monitor or manage in their portfolio.

“We are already using this methodology to assess equity managers beyond traditional frameworks and plan to extend this to other asset classes. We have found it particularly useful for understanding what has driven performance when there has been a divergence in fundamentals and stock price performance in the broader market. Going forward, we believe this methodology will also be able to support investors who are looking to align their portfolios with ESG objectives but find it difficult to identify whether the decarbonisation of a portfolio is, for example, due to reduction of the emissions of the underlying companies or the divestment of companies with high emissions. companies. We believe this framework, and an improved version of the tool, could provide much-needed clarity on how ESG objectives are managed and achieved,” said Craig Baker, Global CIO at WTW.

“S&P Dow Jones Indices welcomes the opportunity to share insights with the Thinking Ahead Institute on this research project,” said Aye Soe, Managing Director, Global Head of Commodity and Multi-Asset Management at S&P. Dow Jones Indices (S&P DJI). “As the world’s leading index provider, our independent indices and benchmarks help promote a better understanding of global financial markets, which aligns with the purpose of the FRA framework. Working with organizations such as TAI helps S&P DJI continue to educate market participants on the benefits of indexing and how transparent indices help measure market risk, returns and opportunity.

“We are delighted to have supported TAI in the development of this open source 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 generating wealth in the economy,” said Stuart Dunbar, Partner at Baillie Gifford.

Notes to Editors

The Thinking Ahead Institute’s Fundamental Return Attribution framework separates portfolio returns into three main components: 1) returns resulting from changes in market sentiment (multiple return), 2) growth in the portfolio’s fundamental characteristics (return growth rate) and 3) change in these fundamental characteristics due to changes in portfolio holdings (activity return).

Breaking down returns into these three components allows for a deeper understanding and evaluation of how an investment strategy generates returns. Compared to more traditional attribution methods that focus on explaining returns by the performance of different groups of securities, this approach considers how the investment process generates aggregate returns due to the asset manager’s current decisions. or its past asset selection decision.

The approach separates returns arising from changes in short-term market sentiment, allowing for a longer-term perspective by asset owners and asset managers when assessing recent performance or defining future performance expectations. For more details, read the research paper: Fundamental return attribution — separate returns due to short-term noise from intrinsic portfolio growth.

About Thinking Ahead Institute
The Thinking Ahead Institute was established in January 2015 and is a global not-for-profit investment research and innovation group of institutional asset owners and asset managers committed to raising capital for a sustainable future. It has over 55 members worldwide and is an outgrowth of WTW Investments’ Thinking Ahead Group, which was established in 2002. To learn more, visit www.thinkingaheadinstitute.org

About WTW

At WTW (NASDAQ: WTW), we provide data and insights-driven solutions in the areas of people, risk and capital. By leveraging the global vision and local expertise of our colleagues serving 140 countries and markets, we help organizations refine their strategy, build organizational resilience, motivate their people and maximize their performance. By working hand-in-hand with our clients, we uncover opportunities for lasting success and provide insight that moves you. Learn more at www.wtwco.com.

contacts

Ed Emerman: +1 609 240 2766
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