We tested 362,880 ways of assessing fund performance. This is what we found.

How does your firm’s investment proposition assess and select funds? No matter what form your investment offering takes, this assessment will be happening. Maybe an external partner does this for you, or you discuss and analyse fund data internally, in an investment committee meeting, perhaps?

It’s likely that you, or your outsourced partner, will look at common indicators of fund performance. Sharpe, Alpha, Beta, Volatility and so on.

To our mind, there are nine key criteria for assessment. The four listed above, paired with Maximum Loss, Average 6 Month Performance, Average 36 Month Relative Performance, Research Rating and Star Rating.

But if you take these nine criteria and try to use them to assess the funds in any given sector, which should you give most weight to? How can you or your investment partner tell when you should be paying more attention to Sharpe? Or when Alpha is your key tool? Do you always focus on a favourite? How do you turn your theoretical ranking of importance into applied weighted assessment of funds?

There are 362,880 possible ways of objectively ranking and applying those nine criteria. We were not sure what result each of those weightings would produce for clients. So we decided to put them to the test. All 362,880 of them.

Just ten years ago, this analysis would have taken our computers 247 years to complete. Today, our very clever developers have written our program so that it can simultaneously perform 15,000 tests across 200 of Microsoft’s fastest computers. This test now takes just 30 minutes!

For the purpose of this exercise, we looked specifically at the UK All Companies sector. So, what happened?

The results not only suggested that some assessment criteria are less important than others, they also found that paying any attention, at all, to three particular criteria can have a negative impact on client investment performance.

And that’s not all. The impact of some criteria wasn’t just negative. It was negative to the extent that removing the three offending criteria could have improved annual performance within the sector by a staggering 3%.

The assessment criteria costing that 3%? Beta, Maximum Loss and Volatility. Ignoring the data they provide you with could have made a performance difference of a magnitude.

I’m sure we are all aware of the importance of choosing and paying attention to fund selection criteria. Now, in this case at least, we have a numerical figure which demonstrates just how important the selection and weighting of those criteria can be in real terms for our clients.

Time to check up on how you, or your external partners, assess fund performance?

#cleveradviserresearch #fundresearch #fundtesting