The U-P ratio for the T. Rowe Price Growth Stock fund indicates this fund's style has 17% more upside potential than downside risk for an investor who must earn at least 8.6% in order to accomplish his/her goal. This statistic is calculated on returns from the fund's style benchmark, which is a blend of large-cap growth, large-cap value, small-cap growth, small-cap value, core and midcap indexes provided by Ron Surz at PPCA-inc.com. The R-squared indicates these indexes explain 90% of how this fund's returns were generated. In other words, one could have captured 90% of this fund's returns by buying a certain mix of these passive indexes. So why pay a management fee? Because this fund earned an annual 5.7% more than its style benchmark on a risk-adjusted basis (Omega excess = 5.7%).
The relative risk table presents some additional information that should be of interest. Using the last three years of monthly returns, it appears the fund's downside risk was 13.4%, which is very high by historic standards. In the first quarter of 2000, I remarked the downside risks for most funds were at historic lows. Using the fund's data to calculate risk results in viewing the fund as having low risk at the top of the market, and high risk after major selloffs.
One way to correct for misleading estimates of risk is to calculate the inherent risk in the fund's style. The 8.8% style risk for the T. Rowe Price Growth fund indicates the inherent risk is much less than one would think using the returns of the fund.
A note of caution: the R-squared for Scudder Dreman indicates the style benchmark only explains 67% of the variance in returns, which casts doubt on the veracity of the risk measures for this fund's style benchmark. Consequently I would have more confidence in the performance measures for, say, the Dodge & Cox Stock fund than for Scudder Dreman.
The risk measures for Neuberger Berman Genesis show the style risk also can be greater than indicated by the fund's returns. While it has the same downside risk (6.9%) as the Dodge & Cox fund, one should keep in mind, the style benchmarks for these two funds are very different.
Frank Sortino is director of the Pension Research Institute, Menlo Park, Calif. The fund data were provided by LCG Associates, Atlanta, and the performance measures were calculated by SAM, a proprietary product of PRI.