Batting Average

StatFacts Batting Average

StatMAP

capital An indicator of consistency, batting volatility benchmark tail PRESERVATION average measures the percentage of batting

time an active manager outperformed R e tu rn average the benchmark. r i s k t r ad e - o ff

How Is it Useful? What Does the Graph Show Me? Batting average is conceptually easy to understand. It The below graph illustrates the monthly outperformance is simply the percentage of periods when the manager of a manager versus the benchmark. The green bars outperformed the benchmark. The higher the batting represent outperformance, and the red bars represent average, the more consistent the outperformance. periods of underperformance. The batting average is simply the number of green bars as a percentage of the total What Is a Good Number? number of bars. The graph below also illustrates the shortcoming of batting The higher the batting average, the better. The highest average. The batting average does not take into account number possible would be 100%, meaning the manager the scale of the outperformance or underperformance. outperformed the benchmark every single period. On Obviously, one would hope to see large green bars and the opposite end of the spectrum would be a batting small red bars. However, batting average only measures average of 0%, attainable only if the manager never the count of outperformance periods. once managed to outperform the benchmark. Generally speaking, a batting average of 50% is used as a minimum threshold for success. Monthly Excess Returns

What Are the Limitations? 20% Batting average has two limitations. First, batting average focuses only on returns and does not take 10% into consideration the amount of risk undertaken by the manager to achieve those returns. Second, batting 0% average does not take into account the scale of the

outperformance. A manager might outperform the -10% benchmark by, say, 0.1% for nine months, but in the

10th month, fall short of the benchmark by 5.0%. In -20% such a case, the batting average would be 90%, but the manager would have dramatically underperformed the Dec 2007 Jun 2008 Dec 2008 Jun 2009 Dec 2009 Jun 2010 Dec 2010 Jun 2011 Dec 2011 Jun 2012 Dec 2012 benchmark. Created with Zephyr StyleADVISOR. Manager returns supplied by: Morningstar, Inc.

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Batting 30% 30% 30%

20% 20% 20% Average 10 years 10 years 10 years Emerging Markets Stocks Investment Grade US Bonds High Yield Bonds 70% 70% 70%

What Are 60% 60% 60% Typical Values? 50% 50% 50% To the right are ranges of 10-year batting averages 40% 40% 40% for universes of separately 30% 30% 30% managed account

composites covering six 20% 20% 20% asset classes. The data 10 years 10 years 10 years

Created with Zephyr StyleADVISOR. Manager returns supplied by: Morningstar, Inc. shows us that many January 2003 - December 2012 managers across all six asset classes struggle to outperform their benchmark more than half the time. Even the best managers Batting Average Large Cap Small Cap International Emerging Gov/Corp HY Bond 2 in the fifth percentile have Funds In the Universe 230 94 325 64 293 96

batting averages that top 5th Percentile 58.33% 57.25% 61.67% 55.71% 65.33% 61.88% out in the 55%-60% range. Over long periods of time, 25th Percentile 53.33% 52.50% 54.17% 51.88% 57.50% 56.67% even the most successful Median 49.58% 50.00% 48.33% 48.33% 50.83% 47.92% managers struggle to beat the benchmark three out of 75th Percentile 46.67% 47.50% 45.00% 45.63% 42.50% 42.29% every five months. 95th Percentile 41.67% 41.92% 39.17% 39.42% 34.17% 34.79%

Related Metrics Math Corner Excess Return: the difference The calculation for batting average is quite simple. between a manager’s returns and Its relative simplicity is both its strength and the benchmark’s returns weakness. It is easy to understand, but limited in what it tells you. Tracking Error: the standard deviation of excess returns of a manager versus its benchmark Information Ratio: a manager’s added value and consistency of added value