Information Ratio Singapore: Judging a Fund Manager’s Skill, Not Just Their Luck
A consistency metric that rewards steady outperformance over a benchmark
The information ratio measures how much excess return an actively managed fund generates relative to its benchmark, per unit of tracking error, indicating how consistently a manager outperforms rather than how large any single period’s outperformance is.
Not financial advice. All figures for educational reference only. Data as at October 2026.
Last updated: October 2026
Key Takeaways
- The information ratio divides a fund’s average excess return over its benchmark by the tracking error (the standard deviation of that excess return over time).
- A higher information ratio suggests a manager delivers more consistent outperformance relative to the benchmark, not just occasional large wins.
- The information ratio is most relevant for actively managed unit trusts; it is less meaningful for passive index ETFs, which aim to track rather than beat a benchmark.
- Singapore investors evaluating unit trusts should compare the information ratio against the same benchmark and time period used in the fund’s own factsheet, since the number is benchmark-dependent.
- An information ratio above 0.5 is often considered good, and above 1.0 is considered excellent, though these thresholds are general industry guides rather than fixed Singapore-specific standards.
What Is the Information Ratio?
The information ratio is a performance metric used to assess how skilfully, and how consistently, an active fund manager generates returns above a chosen benchmark. It is calculated by taking the fund’s average excess return over the benchmark (sometimes called “active return”) and dividing it by the tracking error, which is the standard deviation of that excess return over the measurement period.
The intuition is that any manager might beat their benchmark in a single lucky year. The information ratio instead rewards managers who beat the benchmark steadily and repeatedly, with a smaller or more consistent margin, over managers who occasionally beat it by a wide margin but underperform just as dramatically in other periods.
It is conceptually similar to the Sharpe ratio, but while the Sharpe ratio measures excess return over the risk-free rate relative to total volatility, the information ratio measures excess return over a specific benchmark relative to the volatility of that excess return (tracking error) specifically.
How Does the Information Ratio Work in Singapore?
For Singapore unit trusts investing in local or regional equities, fund factsheets typically disclose performance against a stated benchmark, such as the Straits Times Index for Singapore equity funds, or an MSCI regional index for broader Asian mandates. The information ratio can be derived from this factsheet data by comparing the fund’s historical monthly or quarterly excess returns against that benchmark.
Because the information ratio depends heavily on which benchmark is used, Singapore investors comparing two unit trusts should check that both funds are being measured against comparable benchmarks before drawing conclusions from the ratio alone. A fund benchmarked against the STI and one benchmarked against a broader Asia-Pacific index are not directly comparable on this metric without adjustment.
| Information Ratio Range | General Interpretation |
|---|---|
| Below 0 | Fund underperforms its benchmark on average |
| 0 to 0.5 | Modest, inconsistent outperformance |
| 0.5 to 1.0 | Good, reasonably consistent outperformance |
| Above 1.0 | Excellent and relatively rare consistency of outperformance |
General industry guide, not a Singapore-specific regulatory standard.
Information Ratio Example
A Singapore-focused active equity fund beats the Straits Times Index by an average of 1.5 percentage points per year over five years, with the yearly margin fluctuating between 0.5 and 2.5 percentage points (a tracking error of roughly 1.0 percentage point). Its information ratio would be approximately 1.5 ÷ 1.0 = 1.5, suggesting fairly consistent, skill-driven outperformance.
A second fund also beats the STI by an average of 1.5 percentage points per year, but with much larger swings — some years beating it by 6 percentage points and other years trailing by 3 percentage points, producing a tracking error of 4.0. Its information ratio would be 1.5 ÷ 4.0 = 0.375, suggesting the same average outperformance came with far less consistency, and possibly more luck.
Advantages of the Information Ratio
- Rewards consistency over lucky one-off wins. The information ratio is specifically designed to separate reliably skilled active management from a manager who got one or two calls spectacularly right.
- Useful for comparing active unit trusts with the same mandate. When two funds share a similar benchmark and investment universe, the information ratio is a reasonable way to judge manager skill head to head.
- Complements raw return comparisons. A fund with a slightly lower average return but a much higher information ratio may represent a more dependable long-term choice than chasing the highest headline return.
- Standard, widely understood metric. Because it is used globally in institutional fund evaluation, it allows Singapore investors to apply a consistent, well-established framework rather than an ad hoc comparison.
Risks and Limitations
- Entirely dependent on benchmark choice. Comparing funds using different benchmarks produces numbers that are not meaningfully comparable, even if both ratios look similar at face value.
- Backward-looking. Like most performance ratios, the information ratio is calculated from historical data and does not guarantee the same consistency will continue going forward.
- Sensitive to the measurement period. A fund’s information ratio calculated over three years can look quite different from the same fund’s ratio calculated over ten years.
- Not useful for passive index funds. Since passive ETFs aim to track, not beat, their benchmark, the information ratio is not a meaningful way to evaluate them.
Information Ratio vs Sharpe Ratio
| Information Ratio | Sharpe Ratio |
|---|---|
| Excess return over a specific benchmark | Excess return over the risk-free rate |
| Divided by tracking error (volatility of excess return) | Divided by total portfolio standard deviation |
| Measures consistency of beating a benchmark | Measures overall risk-adjusted return |
| Most relevant for actively managed funds | Relevant for both active and passive portfolios |
The Bottom Line
The information ratio helps Singapore investors see past a single good year and judge whether an active fund manager has genuinely, consistently added value over their stated benchmark. A high information ratio is a reasonably strong signal of skill, provided the benchmark and time period used are fair and comparable.
Frequently Asked Questions
What does a high information ratio mean?
It means a fund has generated excess returns over its benchmark with relatively low variability over time, suggesting more consistent, skill-driven outperformance rather than one-off lucky results.
What is considered a good information ratio?
As a general industry guide, an information ratio above 0.5 is often considered good, and above 1.0 is considered excellent, though this varies by asset class and is not an official Singapore-specific benchmark.
How is the information ratio different from alpha?
Alpha measures the absolute size of excess return, while the information ratio measures that excess return relative to how consistently it was achieved, factoring in volatility of the outperformance itself.
Can I calculate the information ratio myself from a fund factsheet?
Yes, if the factsheet discloses periodic returns against a stated benchmark, you can calculate the average excess return and its standard deviation (tracking error) to derive the ratio, though many factsheets also disclose it directly.
Is the information ratio useful for comparing ETFs?
Not usually, since most ETFs are passively managed and designed to track rather than beat their benchmark, making tracking error itself (not the information ratio) the more relevant metric for ETF evaluation.