S&P method aims to cut luck from role in results
The South China Morning Post Fund Manager of the Year Awards are based on the risk-adjusted returns of the 1,600 retail unit trusts authorised in Hong Kong by the Securities and Futures Commission as at the end of last year.
The award winners are selected according to a methodology based on Standard & Poor's (S&P) Fund Services' Relative Risk Adjusted Ratio. This evaluates the performance of a fund and the consistency of that performance relative to other funds in its peer group sector, and is used for all investment funds awards that S&P conducts around the globe.
William Reidy, S&P managing director Asia-Pacific Investment Services, says the ratio measures true consistency by analysing weekly and monthly data, rather than taking end-of-period measurements as in a traditional total return calculation.
Using weekly and monthly data eliminates the risk of awarding funds that had a short-term lucky break or took some short-term risk that led to a one-off high return.
The calculation is based on bid-to-bid prices in US dollars with gross income reinvested.
The Relative Risk Adjusted Ratio is calculated as follows:
Relative performance: this is the performance of the fund less the performance of its sector average. For instance, if a fund rises 6 per cent in a month and its sector average increases by 4 per cent in the same period, then the fund's relative performance is plus 2 per cent. This number is calculated for each fund for every period under analysis.
Average relative performance: by calculating the average of a fund's monthly relative performances, it can be determined whether the fund underperforms or outperforms its peers on an average basis. The higher the average, the better the fund's performance.
Volatility of relative performance: volatility, or standard deviation, measures the degree to which a series of values deviates from its average. By calculating the volatility of the fund's monthly relative performances, S&P measures how consistently the fund has outperformed or underperformed its peers. The higher the volatility, the less consistent the fund's performance relative to its peers.
Relative return/volatility ratio: by dividing the fund's average relative performance by the volatility of its relative performance, S&P measures the fund's ability to consistently outperform its peers. The higher the ratio, the greater the fund's ability to outperform consistently.
The most prestigious of the awards are the SCMP Group Awards over three, five and 10 years. These awards are aimed at recognising managers which not only offer a wide range of products across investment regions and risk categories, but have also shown consistent performance in all categories.
To qualify for the group award, the group must manage at least 10 funds in 10 sectors. The sector performance analysis score for a fund is the percentile ranking of the return. In other words, the rank is divided by the number of funds in the sector.
The average of percentile scores made by each group is then adjusted for the number of funds the group manages. This method has been used for several years and is widely accepted by the industry.
According to S&P, the exact calculation methodology is as follows:
Take the percentile score for each fund (its rank divided by the number of funds in the sector);
Average the percentile scores for the group;
Adjust the average percentile for the number of funds managed by the group (otherwise small groups will always appear at the top and bottom of the list);
The management group with the lowest score will be the overall group winner.
Worldwide, S&P calculates returns for investment fund awards in 13 countries, including Hong Kong, Singapore, Taiwan, Malaysia and India.
The company says its awards methodology is based on a global model that has been fine-tuned for many years. However, the model retains sufficient flexibility to adapt to local requirements.
