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Better way to assess fund managers?

Investment | Unit Trusts

By Graeme Laws, published 26 August 2010.
Helpful? 33

Could measuring the impact of fund manager decisions be a better way to measure their performance?

I learned last week that Lord Myners came up with a wizard way to measure the performance of fund managers. Put simply, it is the ratio between what the manager’s portfolio actually achieved over a time period, and what it would have achieved if the manger had not bought or sold anything at all.

This would lay bare the impact of the fund manager’s decisions, all of which, of course, cost money because they incur expenses. A bunch of academics have had a go at it, and in two out of three trials, the ‘inertia’ portfolio came out on top over three years.

This would seem to be a great way to shine some light on the unit trust business. Coupled with all cost disclosure in pounds and pence, it could improve the information available and so make the market work better.

Expect no interest in either idea from the regulator.
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Readers' Comments (2) - To post a comment please register or login .

Comment by Defoe at 10:13pm on 26 Aug 2010:

Isn't a proportion of buys and sells forced on unit trust managers by the ebb and flow of money invested with them?

Could one apply the idea to one's own portfolio? The value of the portfolio at the beginning of a period could be compared with the value (excluding any investments bought with 'new' money) at the end; but how one would one deal with any straight sales? Comparing the performance of the funds I did sell with all the other funds I might have sold isn't very appealing. And even if I discovered that I had correctly chosen the best funds to sell, I suppose that I should then have to work out whether I sold them at the best time.

Has anyone a simpler measure?

Comment by justin at 11:49am on 28 Aug 2010:

One way, albeit a bit technical, that I like is to look at a manager's 'information ratio', which is their performance relative to a benchmark (e.g. index) divided by risk taken vs that benchmark (measured by the standard deviation between fund and index returns, i.e. tracking error).

What this shows is whether a manager has delivered attractive returns relative to the risk they've taken - the higher the ratio the better.

Getting hold of the data to calculate it is a pain, but fortunately Citywire displays this measure on its website (called a 'manager ratio') as does Bestinvest via its Manager Record Index (MRI), which takes an information ratio and calculates the probability that the manager achieved it through skill rather than luck.