The methodology used to calculate a single performance rating for unit trust funds, the PlexCrown rating, has been refined. Personal Finance publishes these ratings on its unit trust prices page.
The PlexCrowns have over the past three years been determined from the risk-adjusted returns of funds with at least a three-year history using four measures of the risk the fund takes.
One of these measures is the Morningstar Raw Rating, which measures the risk of a fund under-performing the benchmark for its sub-category.
PlexCrown Ratings has found that when funds are persistently making negative returns, the Morningstar Raw Rating produces results that focus primarily on the risk the fund took relative to those in its sub-category and does not put enough emphasis on the returns the fund earned relative to its peers.
The Morningstar Raw Ratings are then inconsistent with the other three measures used to calculate the PlexCrown ratings.
PlexCrown Ratings has decided to use the Omega measure instead of the Morningstar Raw Rating. The Omega rating measures a fund's gains against its losses in a sophisticated way.
The Omega measure has until now been used instead of the Morningstar Raw Rating only to calculate the PlexCrown rating of asset allocation funds with flexible mandates.
PlexCrown ratings has also decided to use an additional measure, the Treynor ratio, when calculating the PlexCrown ratings of funds in sub-categories with clear benchmarks.
The Treynor ratio quantifies the skills of a fund manager and measures the excess performance a manager generates for taking non-market or non-systematic risk. This ratio will be used for all the domestic unit trust sub-categories except the flexible asset allocation sub-categories.
Initially, it will also be excluded from the calculation of the PlexCrown ratings for domestic prudential funds where some funds are moving out of either the high-, medium- or low- equity sub-categories to the variable equity prudential sub-category.
PlexCrown is consulting the unit trust industry on relevant benchmarks and timing before this measure will be included in the rating of funds in the prudential sub-category.
For now, the Treynor measure will be excluded from the calculations of the PlexCrown Ratings of rand-denominated foreign and worldwide funds.
The impact of the refinement on the ratings of domestic funds has been limited. For the period ended April 30, 2008 there was a minor adjustment to the rating of 28 funds out of a total of 278 funds. Eight of these were domestic bond funds.