It is safe to say that when it comes to manager selection, the investment industry is obsessed with statistics. While it starts with performance information, investors slice and dice the numbers to try to glean information about a manager’s risk and consistency, all in an effort to choose the best manager. Lists of top fund managers are often published based on these performance statistics, and investors use these statistics to screen for the most skilled managers.
A common attribute of many of the commonly used statistics is that they are focused on purely historical data, so lists of top fund managers are retrospective rather than forward looking. The assumption is that the top ranked funds will continue to perform well. For example, Table 1 below shows a group of top performing Large Cap Value managers as ranked by their Information Ratio over the past five years (ending 12/31/2017).
Table 1
| Firm | Product | IR |
| Bridgeway Capital Management, Inc. | Bridgeway Large Cap Value | 1.3034 |
| Martingale Asset Management, L.P. | LargeCap Value | 1.2866 |
| Numeric Investors Management | Value | 1.2719 |
| Goelzer Investment Management | Goelzer Value | 1.2339 |
| Columbia Management Investments | Columbia Disciplined Large Value | 1.1585 |
| LSV Asset Management | Large Cap Value Equity (U.S.) | 1.1129 |
| WEDGE Capital Management, L.L.P. | Large Cap Value | 1.1035 |
| Piedmont Investment Advisors, LLC | Core Value | 1.0662 |
| J.P. Morgan Investment Management Inc. | JPM Growth and Income | 1.0610 |
| CornerCap Investment Counsel | Fundametrics Large Cap | 1.0569 |
| Goldman Sachs Asset Management | US Large Cap Value Equity Insights | 1.0565 |
| Jacobs Levy Equity Management | Large Value (S&P 500 Value) | 1.0523 |
| Columbia Management Investments | Columbia Focused Large Cap Value | 0.9631 |
| Jacobs Levy Equity Management | Large Value (Russell 1000 Value) | 0.9481 |
| T.Rowe Price Group, Inc. | US Tax-Efficient Large-Cap Value Equity Strategy | 0.9409 |
| Acadian Asset Management LLC | U.S. Value Equity | 0.9173 |
| Jacobs Levy Equity Management | Mega Value (Russell Top 200 Value) | 0.9164 |
| Zacks Investment Management | Zacks Dividend Strategy (Large Cap Value) | 0.9131 |
| J.P. Morgan Investment Management Inc. | JPM Large Cap Value | 0.9086 |
| ClariVest Asset Management LLC | ClariVest Large Cap Value | 0.9062 |
| Lyrical Asset Management, L.P. | Lyrical U.S. Value Equity – CS | 0.9005 |
| Dimensional Fund Advisors LP | US Large Cap Value Strategy | 0.8904 |
| WEDGE Capital Management, L.L.P. | Large Cap Value: Expanded | 0.8694 |
| Quantitative Management Associates LLC | QMA Large Cap Value Equity | 0.8674 |
| American Beacon Advisors, Inc. | American Beacon Bridgeway Large Cap Value | 0.8593 |
Note: Includes funds within the top 35% of Excess Returns for Large Cap Value Universe over a five-year period to exclude funds with low active share
Source: eVestment, FIS
As a quick review, the Information Ratio is a measure designed to show the consistency of a manager’s excess return. It is calculated by dividing the manager’s excess return over a benchmark by the standard deviation of the return (a proxy for risk). Few would argue that achieving a high Information Ratio is not an admirable goal for an investment manager, so the managers below should be applauded for attaining a high Information Ratio. That said, using the Information Ratio to choose how a manager is expected to perform in the future is overly simplistic and specifically does not take a manager’s style into account.
Aapryl, however, takes performance analytics to a new level by creating a proprietary metric called Aapryl Return. The metric is designed to predict a manager’s excess return for the next 3 years and is based on style analysis. Table 2 below shows how the same managers would be ranked over the same five year time period using Aapryl Return rather the Information Ratio.
Table 2
| Firm | Product | Aapryl Score |
| Bridgeway Capital Management, Inc. | Bridgeway Large Cap Value | 2.38 |
| American Beacon Advisors, Inc. | American Beacon Bridgeway Large Cap Value | 1.89 |
| LSV Asset Management | Large Cap Value Equity (U.S.) | 1.65 |
| Columbia Management Investments | Columbia Focused Large Cap Value | 1.54 |
| Quantitative Management Associates LLC | QMA Large Cap Value Equity | 1.5 |
| J.P. Morgan Investment Management Inc. | JPM Large Cap Value | 1.21 |
| Dimensional Fund Advisors LP | US Large Cap Value Strategy | 1.21 |
| Columbia Management Investments | Columbia Disciplined Large Value | 1.13 |
| Lyrical Asset Management, L.P. | Lyrical U.S. Value Equity – CS | 0.84 |
| Piedmont Investment Advisors, LLC | Core Value | 0.74 |
| Goelzer Investment Management | Goelzer Value | 0.05 |
| Goldman Sachs Asset Management | US Large Cap Value Equity Insights | 0.02 |
| Numeric Investors Management | Value | 0.01 |
| Zacks Investment Management | Zacks Dividend Strategy (Large Cap Value) | -0.08 |
| WEDGE Capital Management, L.L.P. | Large Cap Value: Expanded | -0.1 |
| J.P. Morgan Investment Management Inc. | JPM Growth and Income | -0.18 |
| Jacobs Levy Equity Management | Large Value (S&P 500 Value) | -0.26 |
| Jacobs Levy Equity Management | Large Value (Russell 1000 Value) | -0.26 |
| WEDGE Capital Management, L.L.P. | Large Cap Value | -0.29 |
| Martingale Asset Management, L.P. | LargeCap Value | -0.37 |
| CornerCap Investment Counsel | Fundametrics Large Cap | -0.52 |
| Jacobs Levy Equity Management | Mega Value (Russell Top 200 Value) | -0.52 |
| Acadian Asset Management LLC | U.S. Value Equity | -0.63 |
| ClariVest Asset Management LLC | ClariVest Large Cap Value | -0.72 |
| T.Rowe Price Group, Inc. | US Tax-Efficient Large-Cap Value Equity Strategy | -0.76 |
Source: eVestment, FIS, Aapryl
As can be seen, there are significant differences between the rankings. Most notably, American Beacon rises from 25th using Information ratio to 2nd using Aapryl Return. Other notable changes include Martingale and Numeric dropping drastically while QMA and Dimensional Fund Advisors rise in the rankings.
The dramatic changes in ranking can be attributed to a number of items. First, the Aapryl return was designed to be a forward looking statistic. That is, its purpose as a statistic is to predict the future rather than interpret the past. While the Information Ratio is a very useful measure to assess a manager’s past performance, it has very little utility with regard to predicting a manager’s future success.
Additionally, as previously mentioned, Aapryl Return uses a manager’s style rather than an industry benchmark in its calculations. A manager’s style is calculated by regressing the manager’s returns against various market factors to determine the market exposures that are true drivers of the return. This goes much deeper than simply using a benchmark. Table 3 shows the results of the regression for the managers mentioned for their ranking change as well as for the Russell 1000 Value Index. As can be seen, the factor exposures are dissimilar between many of the managers and the index. This illustrates that a commonly used grouping such as Large Cap Value contains managers with different market exposures. Understanding these differences can provide key insights during the manager selection process that the Information Ratio and many other risk/return ratios simply do not deliver.
Table 3
| Value | Core | Economic Sensitivity | Defensive | Momentum | Yield | Volatility | |
|---|---|---|---|---|---|---|---|
| Russell 1000 Value | 20% | 21% | 19% | 0% | 0% | 41% | 0% |
| Bridgeway Large Cap Value | 15% | 66% | 0% | 13% | 4% | 2% | 0% |
| American Beacon Bridgeway Large Cap Value | 14% | 67% | 0% | 12% | 5% | 2% | 0% |
| Martingale Asset Management, L.P. | 20% | 43% | 15% | 0% | 0% | 22% | 0% |
| Numeric Investors LLC | 13% | 58% | 20% | 0% | 0% | 9% | 0% |
| QMA Large Cap Value Equity | 42% | 0% | 40% | 0% | 0% | 18% | 0% |
| Dimensional Fund Advisors LP | 34% | 0% | 60% | 0% | 0% | 6% | 0% |
Source: eVestment, FIS, Aapryl
Aapryl Return does utilize factor exposures not just to provide an understanding of a manager’s past performance, but also to help predict a manager’s future performance. Research has shown that factor performance can be predicted based on the economic cycle and that a manager’s outperformance over its style is also predictable. So while the Aapryl Return incorporates much more than style into its calculation, Style is the key component. Aapryl’s approach recognizes that managers within commonly used groupings have large differences in market exposures which can lead to significantly different investment outcomes.
To be successful, investors must achieve the best potential future outcomes. This can only be accomplished by focusing on predicting the future rather than gazing at the rearview mirror. Aapryl Return is designed to give investors a glimpse into the future. By ranking managers using Aapryl Return, investors can focus on the probability of future success rather than past performance. This will ultimately make investors more successful.
