The information ratio has been chosen because it is widely deemed a more accurate reflection of a fund manager’s skill than simple past performance figures. This is because it is a risk-adjusted measure, taking into account the amount of risk a manager has taken in order to achieve their outperformance.
Nonetheless, our findings have included past performance figures in order to provide context for the information ratios.
The tables show the results of this analysis. The highest annualised three-year information ratios come from the two funds in the mixed asset space. This is perhaps because, with a wider investment universe to explore, multi-asset investors have greater scope to differ from their peers.
Premier Diversified, a multi-asset fund launched five years ago by Premier Asset Management, has an annualised ratio of 1.9 over three years. In this time period, it outperformed its sector average by 16 per cent.
When it comes to traditional outperformance metrics, overlooked funds have shined brightest in the domestic equity market. The top UK equity vehicle by information ratio, Cavendish Aim, beat its sector average by 44.4 per cent over the three years to 15 April 2018, while Unicorn UK Growth managed even greater outperformance.
The levels of outperformance achieved by the UK funds was not matched across other regions and asset classes. Relative returns are much lower for the top funds in the US equity market, which has proven notoriously difficult terrain for active investors. Similarly, bond funds also displayed more moderate levels of outperformance versus their sector averages.
Our analysis also compared funds versus their benchmarks as well as their sectors. The portfolios in general tended to outperform the former more easily than they did their peer groups – suggesting either a good period for active approaches, or that some funds are measuring themselves against indices that are easy to beat.
It is partly for this reason that we have focused mainly on information ratios that assess a fund’s alpha against its sector, rather than its benchmark. Nonetheless, the funds with the best information ratios versus their benchmarks can be found in Table 3.
Some intermediaries believe that those smaller funds that do measure up have in-built advantages over their larger peers.
“The main advantage of a smaller fund size from a fund manager’s perspective is that it enables them to invest in relatively small companies yet still have reasonable liquidity,” explains Matthew Bird, independent financial planner at Seer Green Financial Planning.
“Managers of bigger funds, for example Terry Smith, cannot practically invest in smaller companies due to the sheer size of their funds. If he tried to put 5 per cent of his [Fundsmith] fund (£500m) into a company valued at £500m he would find it practically impossible.