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Article

How “Informative” Is the Information Ratio for Evaluating Mutual Fund Managers?

Thomas Bossert, Roland Füss, Philipp Rindler and Christoph Schneider
The Journal of Investing Spring 2010, 19 (1) 67-81; DOI: https://doi.org/10.3905/JOI.2010.19.1.067
Thomas Bossert
is managing director (portfolio management) at Union Investment Institutional GmbH in Frankfurt, Germany.
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  • For correspondence: thomas.bossert@unioninvestment.de
Roland Füss
is a professor of finance and holds the Union Investment Chair of Asset Management at European Business School (EBS), International University Schloss Reichartshausen in Oestrich-Winkel, Germany.
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  • For correspondence: roland.fuess@ebs.edu
Philipp Rindler
is a research assistant at the Union Investment Chair of Asset Management at European Business School (EBS), International University Schloss Reichartshausen in Oestrich-Winkel, Germany.
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  • For correspondence: philipp.rindler@ebs.edu
Christoph Schneider
is an analyst at Morgan Stanley, Investment Banking Division in Frankfurt, Germany.
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  • For correspondence: christoph.schneider@ebs.edu
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Abstract

This article aims to determine whether the information ratio (IR) is a useful and reliable performance measure to evaluate mutual fund managers. The authors use a dataset of nearly 10,000 mutual funds for the January 1998 to December 2008 period. The empirical results show that the IR varies over time and across different fund categories. The article finds that representing the true volatility in the return-generating process within a calendar year requires data with a higher frequency than monthly. This reference index or basket needs to capture a large proportion of the investment universe of the respective fund. Because the IR induces managers to hug the benchmark, it should be supplemented with, for example, the Active Share measure to control for the activity level in the portfolio. Finally, in order to separate lucky managers from skilled ones, the long-term track record is an important measure, because luck is generally not persistent over time.

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The Journal of Investing: 19 (1)
The Journal of Investing
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How “Informative” Is the Information Ratio for Evaluating Mutual Fund Managers?
Thomas Bossert, Roland Füss, Philipp Rindler, Christoph Schneider
The Journal of Investing Feb 2010, 19 (1) 67-81; DOI: 10.3905/JOI.2010.19.1.067

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How “Informative” Is the Information Ratio for Evaluating Mutual Fund Managers?
Thomas Bossert, Roland Füss, Philipp Rindler, Christoph Schneider
The Journal of Investing Feb 2010, 19 (1) 67-81; DOI: 10.3905/JOI.2010.19.1.067
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  • Article
    • Abstract
    • THE INFORMATION RATIO
    • DATA DESCRIPTION
    • IS THE INFORMATION RATIO A RELIABLE PERFORMANCE MEASURE?
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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