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Information ratios “have little predictive value”

EUROPE – Investment performance firm WM Co. 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,” said Alastair MacDougall, head of research at WM Performance Services.

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,” MacDougall said.

“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 called ‘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.”


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