When reading Jack Schwager’s amazing book Market Wizards recently, I came across a measure of fund performance I had never heard of before. It’s called the Gain To Pain Ratio or GPR for short. The reason I had never heard of it was because Jack Schwager invented it! It was born out of his frustration with inferior risk/return measures such as the Sharpe Ratio which downgrades a fund which has very high returns because it is deemed to be too volatile!
This is what Jack Schwager had to say about it in his book.
Most people tend to focus only on return. As I see it, as a performance measure, return is only meaningful relative to how much risk was required to get it. You could always get a higher return simply by using leverage; that doesn’t mean it represents better performance. One statistic I particularly like is what I call the Gain to Pain ratio. I define the Gain to Pain ratio (GPR) as the sum of all monthly returns divided by the absolute value of the sum of all monthly losses. This performance measure indicates the ratio of cumulative net gain to the cumulative loss realized to achieve that gain. For example, a GPR of 1.0 would imply that, on average, an investor would experience an equal amount of monthly losses to the net amount gained. If the average return per year is 12 percent (arithmetic, not compounded), the average amount of monthly losses per year would also sum to 12 percent. The GPR penalizes all losses in proportion to their size. Upside volatility, however, is beneficial because it only impacts the return portion of the ratio. In contrast, the Sharpe ratio—the most widely used return/risk measure—penalizes upside volatility. As a rough guideline, for liquid strategies, any GPR above 1.0 is very good, and a GPR above 1.5 is excellent.
Interestingly our associated company, Minerva Money Management’s own fund, the CCM Intelligent Wealth Fund ranks very highly using the Gain To Pain Ratio with a score of 5, calculated by dividing 10 months’ of gains by 2 months’ of losses. That is an exceptionally high score according to Jack Schwager’s methodology. By contrast, the fund is ranked with a high-risk score of 6 out of 7 by its ACD, Carvetian Capital Management, using the FCA’s risk rating methodology which primarily measures risk by volatility. It really doesn’t make any sense, at least any common sense.
CCM Intelligent Wealth Fund
Source: Citywire. 12 months
Of course, this makes little sense especially when you observe the graph of the fund’s performance* over the last 12 months.
As you can see over the last 12 months the fund’s performance hasn’t been exactly what you would call volatile. It’s just risen a lot. By 59.1% at the time of writing.**
So if you are interested in assessing funds using a more appropriate measure of fund risk ratings, I suggest you instead find out the fund’s Gain To Pain Ratio before making your investment decision.*** You know it makes sense.
*Past performance is not a guarantee of future results
***The value of your investment can fall as well as rise and is not guaranteed. The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information contained in this article is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of and relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future.