Guide to Defaqto Quantrater
What is The Defaqto QuantRater?
The Defaqto QuantRater scores funds on a scale of one to five, with one being the lowest rating and 5 being the highest. Funds are ranked within their own sector, in other words against funds that invest in similar assets. For example, all funds investing in North American equities are ranked against each other, all funds that are invested in UK equities aiming to pay a relatively high income are ranked against each other, and so on.
Each fund has a benchmark against which the fund manager measures his own success. The benchmark will be relevant to the area the fund is investing in. For instance, a UK All Companies fund may be measured against the FTSE all share index, a Japan fund may be measured against the Nikkei Dow index.
Part of the QuantRater calculation, the Information Ratio, measures how well the fund is doing in relation to the risk that is being taken. The Information Ratio is, therefore, a good indication of the skill of the fund management team.
The other part of the QuantRater calculation measures how consistently the fund has performed against its peers. This really checks that the fund manager is taking enough risk to achieve performance. It would be no good if the fund manager seems to be achieving some performance by taking almost no risk, if that performance was negligible against its peers. The combination of these two measures in the Defaqto QuantRater is a robust way of identifying skilfully managed funds that perform consistently well.
For many funds, although not all, the manager in charge has a great influence on the success of the fund, so to help in the decision making we have added a ‘y’ to the rating if the lead fund manager has left in the last year, and a ‘yy’ if in the last two years.
The measures are taken over a period of 69 months, which we believe covers most market conditions. Beyond that, we believe that past performance and the factors that have contributed to it have no real bearing to what is happening today and in the future. Also, the factors that contribute to the QuantRater are weighted so that more recent results contribute more to the final QuantRating.
And, as a final safety net, those funds that drop from a QuantRating 5 from quarter to quarter are immediately given a QuantRating of 1 in case the temporary drop in form is the start of a more permanent drop in performance. It is a ‘wait and see’ signal.
QuantRating 5, means top 10%. QuantRating 4 means next 15%. QuantRating 3 means next 25%. QuantRating 2 means next 25% and QuantRating 1 means bottom 25%.
We would stress that the Defaqto QuantRating does not indicate which type of fund to buy, it simply gives a guide to which funds, with this measure, are ranked better against similar funds. In some cases where a particular fund type is performing poorly, a 5 rating may mean that this fund is the ‘best of a bad lot’