Exploring the Correlation of Performance Metrics: A Deep Dive into Fund Managers’ Reporting Strategies
Portfolio managers often showcase their risk-adjusted performance using metrics like Sharpe, Treynor, information, and Sortino ratios. But do these metrics correlate, and could fund managers strategically select which ones to report to paint a more favorable picture of their performance?
To answer these questions, we delved into the historical data of active mutual fund manager returns for large-cap equity funds dating back to the 1950s. By calculating each fund’s Sharpe, Treynor, Sortino, and information ratios on a one-year rolling basis, we uncovered intriguing insights into their correlations over time.
Across the board, we found that Sharpe and Treynor ratios share a high positive correlation, as do the information and Sortino ratios. However, the correlations between Sharpe and Treynor ratios with the information and Sortino ratios were weaker.
Performance Metric Correlations: All Periods, 1950 to 2023
| Sharpe Ratio | Treynor Ratio | Information Ratio | Sortino Ratio | |
| Sharpe Ratio | 1 | 0.95 | 0.25 | 0.24 |
| Treynor Ratio | 0.95 | 1 | 0.24 | 0.23 |
| Information Ratio | 0.25 | 0.24 | 1 | 0.99 |
| Sortino Ratio | 0.24 | 0.23 | 0.99 | 1 |
As we delved deeper into the correlations over each decade, we noticed a consistent pattern that remained fairly steady from the 1950s to the 2020s. Even during recessions, these correlations held up, indicating that fund managers’ reporting strategies did not significantly shift during critical times.
Overall, the data showcased that while the Treynor and Sharpe ratios exhibit strong correlations, similar to the information and Sortino ratios, the weaker correlations with the latter two metrics could provide fund managers with the leeway to strategically report certain ratios over others.
Unveiling Strategic Reporting Tactics
It becomes crucial to scrutinize fund managers’ choice of reported metrics, especially if they emphasize their Sortino or information ratio while downplaying their Sharpe or Treynor ratio. This strategic play could hint at a deliberate attempt to portray their performance more favorably.
For more insightful posts like this, subscribe to Enterprising Investor to stay informed on the latest trends in the investment industry.
All opinions expressed in this post are solely those of the author and should not be considered as investment advice. The views presented do not necessarily reflect the perspectives of CFA Institute or the author’s employer.
Professional Learning for CFA Institute Members
CFA Institute members can self-report professional learning (PL) credits earned by engaging with content like this. Utilize the online PL tracker to conveniently record your credits and enhance your professional development.