The annual ET Wealth-Morningstar ranking has been released (see image below). It is based on weighted average 5-year performance of open-ended diversified equity schemes. The ranking is not based on the returns alone. The aggregate returns were adjusted for risk to evaluate how much risk was taken by the managers to generate the returns.
How the universe of funds was arrived at….
- Open-ended, actively managed, diversified equity funds. Index funds, thematic and sectoral schemes, and funds with global exposure were not been taken into account.
- The performance time frame was the 5-year period between July 1, 2011 and June 30, 2016.
- Schemes with a corpus less than Rs 100 crore were not considered.
- Only fund managers with a continuous 5-year fund management experience during the period under study were considered. For a fund to qualify, the fund manager needed a minimum 2-year experience as lead manager of the fund. To identify the lead fund manager of each scheme, only the primary fund manager mentioned in the scheme factsheet was considered.
- The universe was restricted to fund managers handling assets under management of at least Rs 500 crore across all qualifying schemes.
Risk and returns
The aggregate returns generated by each fund manager were calculated over the 5-year period for all funds satisfying the above-mentioned criteria, and were adjusted for risk. It is necessary to evaluate fund manager performance on a risk-adjusted basis to account for the degree of risk taken by the manager to generate the return.
To get the risk-adjusted score, the asset-weighted monthly returns of all the qualifying funds were calculated. Weighing scheme performance by its corpus size gives due importance to each fund's size.
Then, the annualised geometric mean for the 5-year period was calculated to arrive at the annualised 5-year return.
Further, the annualised standard deviation of the monthly asset-weighted returns was calculated.
The final risk-adjusted return was calculated by deducting the risk-free return (of 364 day treasury bill) from the annualised geometric returns generated by each fund manager, and dividing these by their respective standard deviation.
The above image has been taken from this post. A more detailed write-up can be accessed here.
