WTW has produced an open-source computer code that it claims could help investors gain premiums of up to 1.5 per cent by adopting more long-term investment strategies.

As reported by our sister title, Pensions Age, WTW has created the code through its Thinking Ahead Institute (TAI) not-for-profit research network. It is based on research carried out by TAI on the separation of short-term and long-term return components of an investment strategy, which is set out in TAI's Fundamental Return Attribution (FRA) framework.

The code is designed to make it easy for investment organisations to apply the framework to their own portfolios and develop more meaningful reporting tools, which if widely adopted by the industry would "transform it", according to TAI.

The code 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.

TAI says that this allows investment decisions to be evaluated on changes in the fundamental attributes of a portfolio over time, rather than simply on market-value returns.

This encourages a longer-term outlook, and enables improved dialogue between asset owners and asset managers about the long-term return drivers of an investment strategy, particularly during periods of underperformance.

In addition, it should broaden portfolio-review discussions away from an exclusive focus on short-term performance towards the quality of underlying decision-making and the production of sustainable returns.

TAI co-head, Tim Hodgson, said that the network's research has identified a significant long-term investment premium of up to 1.5 per cent annually, that can be harvested and shared with end beneficiaries.

He added that the industry had become accustomed to short-term performance measures, which are perpetuated by traditional reporting methods, leading to 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,” he said.

The code is supported by TAI’s membership of 55 institutional investors from around the world, including Baillie Gifford, MFS and S&P Dow Jones Indices, who have all helped develop and test the framework and methodology. The FRA framework can be applied to all asset classes through the code and WTW has already been using it to assess equity managers beyond traditional frameworks.

WTW global CIO, Craig Baker, also said that the code could significantly improve investors' efforts to meet their ESG objectives.

"We think this methodology will 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," said Baker.

"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.”

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