Fundamental return attribution framework and open-source code

The benefits of being a long-horizon investor are well established: the return premium associated with adopting a long-horizon mind set is estimated at between 0.5% and 1.5% a year. To promote a longer-term outlook, the Thinking Ahead Institute has developed a methodology that allows portfolio evaluation to be based not only on market-value returns, but also on changes in fundamental attributes over time.

This new attribution and monitoring framework separates a portfolio’s returns into three main components:

• Returns arising from changes in market sentiment (multiple return),
• the growth of the portfolio’s fundamental characteristics (growth return) and
• the change in those fundamental characteristics due to changes in the portfolio’s holdings (activity return).

The intent is not only to promote a longer-term outlook, but also to improve dialogue between asset owners and asset managers. Specifically, it directs conversations towards the long-term return drivers of an investment strategy, particularly during periods of underperformance. In addition, it broadens the portfolio review discussion away from an exclusive focus on short-term performance; towards the asset manager’s decision making and the health of the portfolio.

This methodology was made available to members late in 2018 to allow its application to be tested against actual portfolios following various strategies, with a view to making it widely available thereafter. The intention being to improve industry-wide reporting.

Our grateful thanks go to members: Baillie Gifford, MFS and S&P Dow Jones Indices, for their time, insights and expertise in assisting the production of this research and for supporting the vision to turn this research into innovative open-source code.

Download research paper

Access the open-source code on Github

Read the press release | Article on Top 1000 Funds, Fundamentally resetting reporting

The methodology is explained in the following short video series.