Components of rating :
The rating is based on 3 components
Review of Ratings
The ratings are reviewed in January of each year, using numbers up to the preceding year end.
How we create a data series for a manager
All UK unit trusts and OEIC's, and their respective managed time periods, are considered. The calculation is achieved by constructing an artificial portfolio, as if you had bought and sold all of the manager's funds during the period he/she has managed them. It is the same principle used for constructing a fund sector index. The weighting between funds is equal, but is halved if the fund is co-managed. Any periods where we have no record of fund manager performance is treated as a flat period; these periods could arise due to gardening leave, or to managing non-public/institutional funds.
The track record has only been considered since 01/01/2000
Only UK UT/OEIC’s have been included.
How we create a data series for a benchmark
The identical process is used, as is for the manager data series, the difference being 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 two sources, market movements, and stock picking. 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 will be rewarded with above average performance. The amount of additional returns he 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, top 20% stocks would deliver much higher returns than most stocks. 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 stock picking range the manager fits.
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 %'s:
| 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 %.
Over/under consistency in up and down markets
Each of the ten periods calculated above are also examined to see if the benchmark rose or fell. This is then used to identify which periods were rising and falling market periods. The results are then arranged as per the example below:
| Total periods | OverPeformance periods | UnderPerformance periods | OverPerformance ratio |
|---|---|---|---|
| Overall | 5 | 5 | 50% |
| Rising markets | 3 | 2 | 60% |
| Falling markets | 2 | 3 | 40% |
The measurement we use here is the % points by which the overperformance ratios in rising and falling markets deviate from the overall overperformance ratio, and deduct this from 100. So there is a 10% deviation in both rising and falling markets (=20 points), which, when deducted from 100, leaves 80.
Composite Rating
Each of the above scores are then weighted and combined.
The weightings are as follows:
| Adjusted alpha | 70% |
| Outperformance of market | 20% |
| Over/under consistency | 10% |
Exclusions
Not every manager series is considered for rating.
The following are excluded:
If they are deputy or co-manager of more than one fund then the following rules apply:
Note: any lead or sole manager is included
Alpha Manager designation
Over 1000 managers have been analysed for this rating. After the exclusions, this falls to below 1000. The 100 top scoring managers that still meet the calculation criteria are deemed Alpha Managers. In the event of a draw at the dividing line, the manager with the longer track record will prevail.