November 12, 2024
It can be difficult for an investor to gauge manager performance.1 Looking at a fund’s return is easy and straightforward, but how the manager generated that return is likely just as important. Investors can place constraints on a fund around asset classes, sectors and ratings that differ from benchmarks and peers. Then the overall amount of risk taken has to also be considered.
Take tracking error as an example. Tracking error is a measure of the volatility of excess returns relative to a benchmark. A lower tracking error implies less volatility between a fund's performance and its benchmark, while a higher tracking error implies more volatility between a fund's performance and its benchmark. While it can be an important metric, it can also come with limitations, particularly when market volatility spikes and the assumptions embedded in tracking error models lag observed volatility. PPM monitors tracking error, but it is only one of the many metrics used to evaluate risk.
However, PPM places more importance on the information ratio, a metric in which tracking error is an input. The information ratio is a ratio of portfolio returns above the returns of a benchmark, compared to the volatility of those returns. In other words, it is a fund's excess returns divided by its tracking error.
(1) As of 13 November 2024.
Unless otherwise stated, the information presented has been prepared from market observations and other sources believed in good faith to be reliable. Information and opinions expressed by PPM are current as of the date indicated and are subject to change without notice. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed.
Past performance is no guarantee of future results. Investments involve varying degrees of risk and may lose value.
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