Defaqto’s information ratio measures a fund manager’s skill in using risk by looking at how much return is achieved above the benchmark through tracking error. First and second quartile placings in its tables identify funds where the manager has used risk most effectively.
Its consistency of performance rankings measure how consistently funds have performed against their peer group, with first quartile funds being the most consistent.
Defaqto found that 45 per cent of funds ranked first and second quartile for information and consistency of performance in the first issue of Blending Talents, published in December 2006, have outperformed their sector over the three years to March 31, 2008.
When Defaqto looked at funds in the first quartile both for information ratio and consistency, it found that 70 per cent had outperformed.
Further analysis revealed that of the funds in the first and second quartiles for information ratio and first quartile for consistency, 67 per cent outperformed. Around 59 per cent of funds ranked first quartile for information ratio and first or second quartile for consistency outperformed over the period.
Defaqto sees this as evidence that funds placed in the upper quartiles 15 months ago are more likely to deliver above-average performance on a three-year view. It believes that highlighting funds with aboveaverage rankings enables advisers to select funds that have used risk effectively and shown some consistency in their performance ranking.
Principal consultant, investments, Fraser Donaldson says: “No system is foolproof. The rankings are not saying top quartile funds are the best since sliced bread but they should help advisers to avoid disasters.”