The performance reports for solutions in the ARC MPS Index use the ARC Medal Rating as a guide to overall performance. What does the Medal mean?
How confident can you be that an investment solution is performing well? Good past performance may be due to good luck or good judgement, or the investment manager (“DFM”) might have achieved high returns by taking more risk. Equally returns may be higher than expected because the market itself is booming. By using statistical techniques we go beyond standard performance tables based purely on return, by adding four extra ingredients into the calculation of an ARC medal, namely: return; risk, style and trend.
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Medal |
Explanation |
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Investment Solutions receiving a Platinum ARC Medal have achieved a level of consistency and risk-adjusted out-performance relative to their MPS peer group that makes them the star performers. |
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Gold ARC Medals are allocated to those Investment Solutions that have delivered out-performance of their MPS peer group in a manner and to an extent which suggests the investment process being employed had added systematic value for investors. |
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Investment Solutions awarded Silver ARC Medals have out-performed their MPS peer group on a time weighted, risk-adjusted basis. |
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Bronze ARC Medals are awarded to Investment Solutions which have under-performed their peer group on a risk-adjusted basis but can reasonably be expected to recover that under-performance in the future. |
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Investment Solutions that are not awarded an ARC Medal have systematically under-performed their peer group on a time weighted, risk-adjusted basis. |
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Unrated |
Unrated accounts either do not have a benchmark, or do not have a history of at least three years. |
Return
The traditional return-based ranking system takes no account of the expected returns of a particular investment solution. By comparing each investment solution to the relevant ARC MPS Index, performance is assessed relative to a relevant yardstick. This approach allows a more accurate assessment as to whether a DFM is truly adding value over time.
Risk
Higher risk implies higher returns but standard performance measures take no account of this relationship. ARC adjusts for risk to ensure that investment solutions are measured on a consistent basis. This allows the efficiency of DFM to be assessed. It provides information as to whether the investor is being adequately rewarded for the risks being taken within the investment solution.
Style
It is much easier to tell if an investment solution is performing better or worse than a benchmark if the two are moving closely together. This degree of closeness is measured by correlation. One would expect investment solution movements to be correlated to those of the benchmark. However, the degree of correlation varies depending on the investment process adopted. For example, an investment house that adopts a concentrated or contrarian investment strategy is likely to have a lower correlation with the benchmark than an investment house that utilises a more diversified approach. The higher the correlation the more certain we can be that past relative performance provides an accurate reflection of future relative performance.
Trend
In standard performance tables, each month’s performance is weighted the same. Consequently, an exceptional performance in a single period will assist performance throughout the period under review. ARC uses a weighting system that gives more weight to recent figures than older ones. That means exceptional returns over a single period slowly decline in importance over the three year performance review period utilised in calculating the ARC medals.