Pooled fund manager Orbitex Investments is challenging its competitors to adopt the Information Ratio risk measurement index and to increase industry transparency.
The index – a joint enterprise between risk control system BARRA and risk analysis firm Risk Reporting – measures the amount of risk fund managers take to achieve their returns.
Where performance between managers is similar, the amount of risk each fund manager has taken can be used as a measure of how much skill, or luck, they took to achieve their returns.
The measurement is created by analysing every trading movement on every stock in a fund manager's portfolio daily over a single quarter.
Orbitex claims Information Ratio is the best guide to future performance available – yet only 25 of the 80 pooled fund managers currently have their results analysed by the index.
Orbitex Investments global chief investment officer Robin Geffen said it decided to publicise its praise of the index because of its more accurate measurement than the CAPS league table.
“There have been significant changes in the CAPS league tables which we think are cosmetic, compared to this.”
Geffen added: “There is all this talk that past performance is not a guide to future performance. But if you can identify a manager who has consistently performed well through taking measured units of risk and gaining a high return then it is likely that the future performance will be good.”
The Information Ratio is currently used by 13 leading consultants including Hymans Robertson, PricewaterhouseCoopers, Bacon & Woodrow, Watson Wyatt Worldwide and William M Mercer.
Hymans Robertson investment partner George Henshilwood agreed that the index should be adopted by all pooled fund managers and will start to question why unsubscribed managers do not subscribe.
He said: “You cannot look at a fund manager’s return in isolation. You have got to understand the risks that he has taken in order to produce that performance.”
Hewitt Associates investment partner Nancy Dickie said that while risk reporting was of use, she would always take into consideration other factors, particularly staff changes at fund managers when looking at Information Ratio figures.
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