UK - Pension funds are only able to achieve high information ratios over short periods, a new study by WM Performance Services finds.
"Only 13% of funds achieved information ratios of at least 0.5 in the two consecutive three-year periods," Jeanette Patrizio, head of WM Performance Services, explained.
The information ratio is defined as the fund's performance relative to its strategic benchmark, divided by active risk taken. It evaluates to what extent active risk has been converted into excess return.
"The findings of this report should act as a reality check for pension fund trustees," she added and urged trustees to work with their investment advisors to choose the most appropriate investment arrangements for the fund.
In its findings WM also points out that the information ratio says little about future performance and shows only very little correlation with implementation factors such as fund structure or mix of active and passive investing.
"The information ratio is a particularly useful analytical tool, as it captures the inputs of all parties involved in the investment process, including trustees, consultants and managers, and it evaluates to what extent active risk has been converted into excess return," Patrizio said.
"However, our research shows that neither consultant advice nor manager performance come with any guarantees."
For the survey WM looked at a sample of 250 UK pension funds with an aggregate value of £436bn at the end of 2005.