Investor Corner/Building and judging a portfolio/Performance Measurement
3.2.6 Information Ratio
The information ratio measures a fund's excess return over its benchmark, divided by how consistently that excess return was delivered. It is one of the more direct ways to measure genuine active management skill.
Rewarding consistency of outperformance, not just its size
A fund that beats its benchmark by a small amount, but does so reliably and consistently across many periods, will show a higher information ratio than a fund that beats its benchmark by a larger amount in some periods while trailing badly in others. The ratio is specifically designed to reward steady, repeatable skill over an outcome that looks impressive purely because of one or two standout years.
How it differs from the Sharpe ratio
The Sharpe ratio measures return relative to total risk taken, using the risk-free rate as its reference point. The information ratio instead measures return relative to a chosen benchmark, using the consistency of that benchmark-beating performance as its reference point. It is specifically built for judging active managers against the very benchmark they are actually trying to beat.
Where to find it and how to use it
Information ratio is available on many fund research platforms and factsheets, generally calculated over a stated multi-year period. As with most single-figure ratios, it is most useful alongside other measures rather than as a lone deciding factor, but a consistently higher information ratio over a genuine multi-year period is a reasonably meaningful signal of skill.
How PriLytics helps. PriLytics shows your fund's performance against its benchmark over any period you choose, giving you the raw data behind ratios like this for your own actual holdings. Compare against a benchmark.