Batting average is conceptually easy to understand. It is simply the percentage of periods when the manager outperformed the benchmark. The higher the batting average, the more consistent the outperformance.
The higher the batting average, the better. The highest number possible would be 100%, meaning the manager outperformed the benchmark every single period. On the opposite end of the spectrum would be a batting average of 0%, attainable only if the manager never once managed to outperform the benchmark. Generally speaking, a batting average of 50% is used as a minimum threshold for success.
Batting average has two limitations. First, batting average focuses only on returns and does not take into consideration the amount of risk undertaken by the manager to achieve those returns. Second, batting average does not take into account the scale of the outperformance. A manager might outperform the benchmark by, say, 0.1% for nine months, but in the 10th month fall short of the benchmark by 5.0%. In such a case the batting average would be 90%, but the manager would have dramatically underperformed the benchmark.
The below graph illustrates the monthly outperformance of a manager versus the benchmark. The green bars represent outperformance, and the red bars represent periods of underperformance. The batting average is simply the number of green bars as a percentage of the total number of bars.
The graph below also illustrates the shortcoming of batting average. The batting average does not take into account the scale of the outperformance or underperformance. Obviously one would hope to see large green bars and small red bars. However, batting average only measures the count of outperformance periods.
Below are ranges of 10-year batting averages for universes of separately managed account composites covering six asset classes. The data shows us that a many managers across all six asset classes struggle to outperform their benchmark more than half the time. Even the best managers in the fifth percentile have batting averages that top out in the 55%-60% range. Over long periods of time, even the most successful managers struggle to beat the benchmark three out of every five months.
The calculation for batting average is quite simple. Its relative simplicity is both its strength and weakness. It is easy to understand but limited in what it tells you.
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