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:
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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.
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We look at the returns on a monthly basis, both in absolute terms and,
more importantly, relative to a benchmark index.
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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.
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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.
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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.
Bestinvest (Brokers) Ltd & Bestinvest (Consultants) Ltd are authorised and regulated by the Financial Services Authority