What is the Elite Rating?

We want the Elite Rating to be a badge you can trust. We typically award our Elite Rating to no more than 10% of funds in any sector. Unlike some agencies, we don’t run a tiered system. Our philosophy is pure: a fund is either good enough or it’s not.

A lot of work goes into reaching this simple conclusion, however.

AlphaQuest – the foundation of the Elite Rating

Our process begins with our proprietary quantitative screening tool, AlphaQuest. A fund must pass this screen before we will proceed any further with our research. We start by measuring risk-adjusted performance and we always look at the figures after charges. Managers must have a track record of at least three years to be considered.

While many screens exist that analyse past performance, AlphaQuest is unique because it focuses on future performance. It estimates how likely a manager is to continue to deliver superior returns. It does this by stripping out the impact of market movements to identify the returns attributable to manager skill.

Alpha generation is often lumpy, reflecting style bias and market conditions. So, AlphaQuest analyses the consistency of the alpha as well as its absolute level. It uses weekly data over 10 years (or the life of the fund or tenure of a manager if shorter) to calculate both the average annualised alpha and the annualised volatility of the alpha. It uses this data to generate an expected alpha range and predict the probability of positive future alpha in a statistically robust way.

Our four step process

  1. We start with AlphaQuest, as outlined above. Only funds that pass this screen and whose managers show a high probability of continuing to deliver alpha over the next 12 months will proceed to the next step of our process.
  2. Those fund managers who pass the AlphaQuest test are then subjected to further detailed qualitative analysis. Our experienced research team will interview the fund manager face-to-face to better understand and assess how their investment process and style gives them an edge over other managers.
  3. When we meet a manager, we grill them on their process and satisfy ourselves that they know what they’re doing. We identify their investment philosophy and drill down into their portfolio to check that it is consistent with that philosophy. We look at the team they have behind them and whether they have any constraints.
  4. Once this analysis has been completed, the research will be subject to peer group review within our team. Only then will those funds, whose managers we believe to be the most skilful, be awarded an Elite Rating.

Funds gaining or losing an Elite Rating

We’ll always notify investors via our Elite Funds news if a fund gains or loses an Elite Rating. We also keep a record of any Elite Funds that have gained or lost Elite Ratings over the years.

Elite Radar

The Elite Radar is a special badge for funds that are on our research team’s watch list and are potential candidates for a full Elite Rating in the future. The idea is that if we are watching these funds, you may like to do the same.

Funds that are awarded the Elite Radar accolade may, for example, be newly launched (and therefore not have the requisite minimum three-year track record to go through AlphaQuest) but we have been impressed by the manager. Alternatively, a manager we rate very highly may have been given a new type of mandate or a fund in a different asset class.

When a three year track record is available, these funds will then considered for a full Elite Rating.

Some funds with a three-year track record may also be awarded the Elite Radar badge if the AlphaQuest score is only slightly above the pass rate and the investment committee would like more data on which to make a judgement.

A fund can stay on the Elite Radar until its six-year track record is completed. At that time it must either be Rated or lose its Radar badge.