Information ratios 'have little predictive value'
Investment performance firm
WM Co based in Edinburgh. says
information ratios, a measure of
asset manager performance, are of
“little predictive value”.
“Our evidence would suggest that
IRs do not persist from one period to
the next, so it is a measure with little
predictive value,” says Alastair Mac-
Dougall, head of research at WM.
Information ratio is the ratio of
expected return to risk, as measured
by standard deviation. It’s a
statistical technique that can be
used to measure a manager’s performance
against a benchmark and
is seen as a measure of skill.
“Consistency is more apparent
when analysing portfolio biases
such as size holding and, more particularly,
investment style,” he says.
“Additionally, very few managers are
able to maintain high information
ratios in the long term, which confirms
that a more comprehensive approach
to active manager selection should
involve analysis of people, products
and processes and not solely focus
upon past performance returns.”
WM, part of State Street, measures
more than 6,000 investment
portfolios. It has published a
research report ‘The Information
Content of Information Ratios’.
The firm said: “Managers with good
recent performance numbers will usually
be able to quote IRs of 0.5 or above,
but the reality is that for the average
investor in a market, the IR will be negative
after costs as, in aggregate, managers
can only achieve the market
index performance before fees.
“Any positive IR (greater than
zero), after costs, is therefore good,
but according to the report, investigations
into IRs as a unit of measurement
must focus upon their
magnitude and sustainability.”