FE Alpha Manager Ratings rate the performance of a fund manager over their career including all funds they have managed and places worked.
They are designed to distinguish fund managers who have consistently performed well over the longer term. The robust methodology is comprised of two key components:
• Risk adjusted alpha/Sortino (with track record length bias)
• Consistent outperformance of a benchmark overallData series for a manager
The calculation runs from the 01/01/2000 and considers IA (Investment Association) funds, Investment Trusts and offshore collectives for sale in the UK. The data series for a benchmark
When calculating the benchmark the same process is applied as when calculating the manager data series, the difference being that sector average data is used in place of the fund data. We call this benchmark the Peer Group Composite. Alpha (risk adjusted)
In a simple model, returns are generated by 2 sources, market movements, and stockpicking.
Beta is the measurement of how the market performance affects the fund performance ... e.g. if the market changes by +/-10% how much does the fund change by?
A beta of 1 would imply it would jump by +/-10%, and a beta of 2 would imply it would jump by +/-20%. Alpha is a measurement of the fund manager’s ability to stockpick.
It is the extra returns he/she generates over and above the market returns, once the market effects on performance have been removed. High beta is great in up markets, and terrible in down markets. Alpha is best in both.
If a manager consistently picks top 20% stocks (of a sector), he/she will be rewarded with above average performance.
The amount of additional returns he/she receives by doing this depends upon the volatility (or standard deviation of the returns on underlying stocks) – e.g. if the variation in returns is vast, for the stocks of a given sector, the top 20% of stocks would deliver much higher returns than most.
In contrast, if a sector has a much smaller spread of returns, the top 20% stocks will only deliver a small extra performance bonus.
So to create a level playing field across different assets, alpha is risk adjusted by scaling it by the volatility, such that we get an indication of where in the stockpicking range the manager fits. Sortino
We recognised in our calculations that alpha is only as good a measurement as the correlation of the fund to its benchmark.
With a lowly correlated benchmark, the pure alpha calculation will over exaggerate the true alpha value, as it explains all uncorrelated parts as alpha generated returns (positive or negative).
In reality, the manager has invested in other markets, and those markets also generate risk and return (non-zero).
This is particularly noticeable in managed and absolute return style funds. As such, we have now released a new extension to the rating within the alpha component, which recognises this.
Our alpha is now essentially weighted by its correlation, with the remainder (of the weight) coming from Sortino*.
The result is essentially a sliding scale between risk adjusted alpha and Sortino, where correlation determines where on the scale. For a manager with perfect correlation the result is the alpha calculation (risk adjusted), and for a manager with zero correlation the result is the Sortino ratio. Risk adjusted alpha, with track record bias
Using the manager history, and the attendant benchmark, alpha is calculated for each manager over the full period available since 01/01/2000. Any flat periods are ignored.
The alpha values are then scaled by volatility, as per the alpha discussion above.
These scores are then arranged into a percentile array.
At this point we introduce the ‘career bonus’ factor. Anyone whose available track record (after taking out blank periods) meets the following criteria, has their percentile score enhanced by the following:
4-6 years = 5%
6-8 years = 10%
8 years+ = 15%
If, as a result of enhancing the adjusted alpha percentiles, the top score exceeds 100, the whole series of manager scores will be rescaled back within the range 0-100. Outperformance of benchmark
Assuming the available track record is >30 months, each manager track record will be split into 10 discrete and equal periods of whole months.
In each period, it will be determined if the manager has outperformed his/her benchmark. The number of outperforming periods will be divided by the total number of periods and expressed as a %.
*Sortino ratio is a risk return measurement very similar to the Sharpe ratio, though it measures its risk purely from downward returns. Composite rating
Each of the above scores are then weighted and combined.
The weightings are as follows :
Adjusted alpha = 77%
Outperformance of market = 23%Exclusions
Not every manager series is considered for rating. The following are excluded:
• Any manager who is not currently managing an IA fund
• Any manager with an active track record of less than 48 months
• Any managers of cash funds, protected/guaranteed funds, passive-tracking funds, or funds within the IA pensions sector
• Any management team (i.e. non-personal)
• Any manager whose track record exhibits excessively high or low beta (<0.5 or >1.5)
• Any person who only manages one fund and is deputy or co-manager (as distinct from lead manager). If they are only a lead manager on one fund, its AUM must exceed £35m.
If they are deputy or co-manager of more than one fund then the following rules apply:
• If 2 funds then at least one fund must have a size of >£100m
• If 3 funds or more then at least one fund must have assets of more than £40m
• Note: any lead or sole manager is included as long as they manage more than £35m FE Alpha Manager designation
Over 1600 managers have been analysed for this rating. The top 10% of scoring managers that still meet the calculation criteria are deemed FE Alpha Managers. In the event of a draw at the dividing line, the manager with the longer track record will prevail. Review of Ratings
The ratings are reviewed in January of each year, using numbers up to the preceding year end.