The financial services company has looked at the returns and standard deviation over the past three and five years of long-only Australian equity funds – 107 in total – and broken them down into quintile rankings; the funds with the best performance and funds with the lowest standard deviation fell into the fifth quintile (best).
Looking at the data over three years through to May 2021, AFM found that of the 22 funds that made up the fifth quintile for performance, only nine were in the first quintile for standard deviation, concluding that strong performance does not require higher standard deviation.
Meanwhile, only six funds in the first quintile (worst performers) were in the fifth quintile for standard deviation.
When looking at the data over five years, the data showed that 12 of the 19 funds in the fifth quintile were also in the first or second quintile for standard deviation.
“Clearly, while there is some minor correlation in this data, the ideal of using standard deviation as a measure of manager skill, especially in isolation, is not a prudent investment conclusion,” AFM said in a statement.
“Investors and advisors should be looking at multiple risk data points such as Sharpe ratio, Sortino ratio, up and down capture and downside deviation, to help them make the most effective investment decisions.
Neil Griffiths
Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.
Neil is also the host of the ifa show podcast.
