Assessing Long-Term Investor Performance: Principles, Policies and Metrics

Abstract

Long-term investors (LTIs), such as pension funds, super funds, sovereign funds, and endowments, are increasingly engaging in innovative investment activities. Many have sought to use their time horizon and their scale as comparative advantages in order to access financial markets on better terms, aligning their own interests and those of their beneficiaries with external service providers. While these innovative approaches to investing have seemingly come with successful outcomes, they have led to a new problem: The objective assessment of the performance of these new long-term investment strategies. The risk-adjusted rate of return, relative to some benchmark by asset class and/or asset manager, is no longer sufficient for judging bespoke inputs with long-term outcomes. Boards of directors, and the senior managers they hold accountable, require new kinds of metrics to assess performance. In this paper, we provide a principles-based model of investment management relevant to all long-term investors, which we then use to formulate a set of measurements and metrics of performance appropriate for even new and innovative investment processes. We argue that our metrics of performance are superior for long-term investors than existing methods to assess investment performance.