The style-risk-adjusted analysis this quarter uses six different indexes for U.S. stocks, two of which break down the Standard & Poor's 500 Stock Index into value and growth. It also uses Treasury bills to capture any cash holdings, and two indexes - Europe and Pacific Basin - to capture foreign holdings. Risk was measured over a 27-year interval and the style betas were calculated over a seven-year interval.
To help in understanding the data in the table on this page will analyze the T. Rowe Price Science and Technology fund. This fund ranked first on that chart because it has the highest five-year, risk-adjusted return (Omega 5). The fund name has an asterisk because the style analysis explained only 76% of the variance in the return for this fund. Any fund with an R-squared less than 0.8 is identified with an asterisk. The lowest was 0.73 for PBHG Growth.
The downside beta of 0.7 indicates the fund took only 70% of the risk associated with its identified style. This is a ratio of the manager's downside risk to the downside risk inherent in the style of 22% very small growth stocks and 78% midsized growth stocks.
The one-year Omega of 9.9% is a one-year, risk-adjusted return. After adjusting for risk, the 14.1% realized return was reduced by 420 basis points. This assumes the average risk-averse investor now requires a risk premium of 600 basis points to stay in stocks. The five-year Omega return of 20.8% is the five-year realized return of 25% adjusted for risk. The Omega excess return is the risk-adjusted return of the fund minus the risk-adjusted return of the style benchmark. The five-year Omega return of this fund was 14.7% greater than the returns that could have been earned by owning the combination of style indexes generated to characterize the fund. For more details, visit the P&I Website: www.pionline.com/whitepaper/sortino.
