Portfolio Construction and Performance Evaluation for Long-term Investors

An integrated approach to portfolio construction and performance evaluation is developed to support investment programs based around long-term cash flow projections and associated expected returns. Performance is evaluated by attributing realized returns into components reflecting the initial expected return, changes in discount rates, changes in expected cash flows, and currency effects. The approach is designed to focus attention on the key drivers of long-term returns – cash flows generated over the long run, relative to the price paid – while de-emphasizing price fluctuations arising from other sources. Application of the approach is addressed through an illustrative example, and discussion of implementation and other issues