Asset owners such as pension funds, insurance companies and sovereign wealth funds are navigating an increasingly complicated investment landscape, according to Ortec Finance.
Greater dynamism in asset allocation, heightened governance expectations and a growing mix of internal and external managers have all added layers of complexity to fund management. Merger and acquisition activity in markets like the UK and Australia has further accelerated this trend, with professional investment organisations now overseeing a wide and diverse range of asset classes and instruments, it said.
Against this backdrop, evaluating total fund performance has become a significant challenge. A comprehensive, fund-wide view requires more than a snapshot of portfolio structure — it demands a framework that captures the underlying decisions driving that structure. A top-down, decision-based attribution model is needed to explain multi-asset processes, overlay strategies and the relationship between policy and implementation. Crucially, such a model can pinpoint strengths and weaknesses within the investment process, providing actionable insight to improve future outcomes.
An asset owner’s investment process follows a top-down hierarchy of decisions, with each one contributing to the overall profit or loss at fund level, Ortec explained. Within this framework, the value of higher-level decisions should not be distorted by operational choices made further down the chain. For instance, the value attributed to a decision to allocate capital to active management ought to be assessed independently of the alpha generated by any individual manager.
By modelling this full Investment Decision Process (IDP) — spanning strategic and tactical decisions through to overlay strategies, manager allocation and security-level choices — asset owners can measure each decision’s contribution to total fund performance and identify the key factors driving results.
Standard attribution approaches, such as conventional equity attribution models, explain performance through the lens of portfolio structure. The IDP approach, by contrast, explains performance through the lens of decision-making. It quantifies the impact of every choice, from high-level strategic asset allocation and currency policy to implementation decisions such as duration positioning or stock selection. It also surfaces implicit sources of risk and return, including benchmark mismatches and asset allocation drift.
This makes IDP particularly powerful for multi-asset funds, fiduciary managers and overlay strategies — any investment process shaped by a layered series of decisions, it said. Where standard attribution typically examines allocation and selection effects, decision attribution goes further by directly linking outcomes to the decisions that shaped the portfolio.
Central to the IDP framework is the use of specific benchmarks for each decision layer. Each decision acts as a reference point for the next, with value added measured by the difference in results between layers. Importantly, the added values from all decisions will always aggregate to the fund’s overall profit or loss — ensuring full accountability across the investment process.
The IDP approach also helps overcome several common performance measurement challenges. These include measuring the unintentional allocation effect of illiquid assets, avoiding issues arising from benchmark inconsistency, accurately modelling multi-asset class portfolios and reducing pitfalls associated with overlays, absolute return strategies, hedge funds and leveraged investments.
Ortec Finance has embedded the IDP framework into its performance measurement and attribution solution, PEARL. The platform provides asset owners with configurable fund structures aligned to their investment decision hierarchy. Combined with PEARL’s currency overlay attribution and flexible, time-dependent fund and benchmark hierarchies, the solution enables asset owners to accurately calculate the added value of each investment decision — offering a clearer, more intuitive explanation of performance for stakeholders managing complex portfolios.
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