This is exactly the same in principle:
- information ratio is average excess return divided by tracking error. The tracking error being exactly the standard error of excess returns
- the skill ratio presented here is based on 5yr rolling excess returns. I is therefore a kind of 'rolling 5yr' information ratio.
There pros and cons for using such a rolling statistics. The most striking negative of such a stati is apparent on charts above: they are 'smoothed' over time. Statisticians call for auto-correlations in data which generally dampens the precision of std error or average estimates.
The main positive is to provide a medium term view which is key to assess skill.
I wonder is there are dfferent smoothness degree among active Funds in excess returns. Put another way: how quickly are the active manages excess returns mean revert?
My guess:
- the slower the worse in terms of 'skill' - (you have to wait longer to realize the skill as an investor).
- Factor investing is built to maximize information ratios (or skill ratio), but might be slower to mean revert tahn active managers excess returns.