Measuring performance for ‘long-horizon’ investing

There are many highly credentialed advocates of ‘long-horizon’ investment (LHI) performance measurement whose works are referenced throughout this paper. It is considered that LHI performance measurement can add value within a pension fund by adding another dimension to the investment performance measurement process, ie looking through to the underlying earnings of the investment assets in addition to the current appraisal of market-value movements. The most prevalent benchmark for pension funds in many countries is peer comparison; however, this misses the fundamental point that a pension-fund member cares deeply about ‘adequacy in retirement’ and very little (if at all) about how well their fund compares with its peers. While setting a benchmark of ‘adequacy in retirement’ for a defined contribution (DC) plan is problematic, many pension funds can and do set an absolute long-term objective of the cost performance index + (say) 4 per cent. The assumption here is that, over a member’s working life (and given appropriate contributions to the fund), this realistic investment objective will indeed provide ‘adequacy in retirement’. But the problem with performance measurement against such an absolute benchmark is how to measure performance in the short term. A trustee cannot wait 30–40 years to see if the investment objective will be met, they must be able to assess performance along the way. The trustee needs the answer to the question: ‘Was the absolute investment return a good or not so good outcome over the most recent short-term periods?’ The introduction of LHI performance measurement undoubtedly will help to provide an answer to this question.