Consistency as a Compass in Developed Market Equities

This report argues that Information Ratio (IR) is the superior metric for evaluating manager skill in developed market equities. It demonstrates that lower-risk 'Enhanced' core strategies offer more consistent, efficient, and predictable alpha than high-tracking-error strategies.

Key Takeaways

• 1.Information Ratio (IR) is the most effective measure of manager skill for benchmark-relative performance, capturing excess return per unit of active risk.
• 2.Selecting managers based on top-quartile returns is unreliable; only 9% of top-quartile managers from 2021 remained in the top quartile by 2025.
• 3.Efficiency decreases as risk increases; lower-risk 'Enhanced' strategies deliver significantly higher average Information Ratios than 'Highly Active' strategies.

Table of Contents

• First, Information Ratio—What is it?
• Manager selection is difficult
• Instead, focus on IR
• Core exposure offers the most stability
• Targeting the most rewarding risk segment

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