Methodology
"Fund managers change jobs, on average, every four years - so the past performance records of most funds can be disregarded as a reliable indicator of the future. The solution to this problem is to track the performance of the manager, NOT the fund."
Manager Statistical Research Methodology
Our statistical analysis comprises a series of steps:
- We try to look at the record of a manager, for the entire
duration of their career, in each sector (we split out different
sectors because some benchmarks can be much easier to beat than
others). If a manager runs more than one fund in a sector for any
period of time, the results of those funds for that period are
averaged.
- We look at the returns on a monthly basis, both in absolute
terms and, more importantly, relative to a benchmark index.
- We then carry out a number of calculations on this dataset so
that we can look at performance in each of the past five years and
cumulatively over the past 3 and 5 years. In cases where the
manager has taken gardening leave, or a sabbatical, the periods
will not be continuous, in which case the records for the past 3
years and 5 years may be incomplete.
- As part of our process to try and understand the style of the
manager we calculate the Maximum Loss (in both absolute and
relative terms) over the manager's career. Every manager goes
through periods of underperformance, but some operate with strict
risk controls to limit the downside. Statistically, it is to be
expected that managers with long track records will also have
incurred larger losses, although this is not inevitable.
- Then, we look at the probability that these results could have
been generated simply by chance. Remember that if you allowed 1,000
monkeys to run funds on a random basis you would expect 31 of them
to beat the Index every year for five years (assuming nil charges),
at which point they would be accorded the status of investment
geniuses by many.
How we Calculate the MRI's
Our Bestinvest MRI (Manager Record Index) has been designed to
try to separate the monkeys from the geniuses.
First, we add back to the performance figures the monthly
running costs of the funds, so that we can assess the performance
on a pre-charges basis. We then calculate the Information
Ratio:
(Relative Performance+Charges) Standard deviation of
returns)
The Bestinvest MRI is then derived from plotting the Information
Ratio on a normal distribution curve (on the assumption that the
returns are, in statistical terms, normally distributed) and taking
this probability away from 100.
Values for the Bestinvest MRI over 99% indicate very strongly
that the manager is adding value and over 95% is also a strong
indicator. Low values (under 10%) indicate that it is highly likely
the manager is destroying value (i.e. they would probably do better
by picking stocks out of a hat!). Any manager with a positive
average monthly return (after adding back the running costs) will
have an MRI of greater than 50%.
Funds which operate with a strong style bias (e.g. most Equity
Income funds) can go through sustained periods of under and over
performance which does not directly reflect the input of the
manager. We suggest that a track record of at least five years
should generally be used to demonstrate how a manager has fared in
different market conditions.
We believe that data for shorter periods than 30 months is
unlikely to be statistically significant and so we do not calculate
the Bestinvest MRI in these cases.
Joint Managers
Dealing with joint managers is problematic. We could either
attribute the fund's record to each of the managers individually or
treat them as a unit. In cases where the managers are taking joint
decisions on stock selection (rather than individually running
parts of the portfolio) we take the latter approach.
Examples of this are Ashley Willing / Simon King (Gartmore) and
Paul Causer/Paul Reed (Invesco Perpetual). In these cases if one
member of the team leaves the record of the individuals has to
start from scratch.
Maximum Loss Example
A good example of a manager who has achieved excellent
cumulative results, but with periods of severe underperformance is
Patrick Evershed. In contrast, Tom Dobell has achieved more modest
outperformance but within a much more controlled risk
environment.
The value of your investments and the income from them can go down as well as up and you can get back less than you originally invested.
Any yields quoted cannot be taken as a reliable indicator of future returns. Before investing in funds please check the specific risk factors
on the key features document or refer to our risk warning notice as some funds can be high risk or complex. Prevailing tax rates and relief are
dependent on your individual circumstances and are subject to change.
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