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Performance - December 01, 2004

An interview with Frédéric Picard, Managing Director of EuroPerformance

On 24th November, the EuroPerformance-Edhec Style Rating was successfully launched at a seminar that was held at the Etoile Saint-Honoré conference centre in Paris. In this interview, Frédéric Picard, Managing Director of EuroPerformance explains more about this joint initiative.

Frédéric Picard

Why are the EuroPerformance-Edhec Style Ratings superior to traditional ratings available on the market?

Frédéric Picard: The Style Rating is based on a true measure of risk-adjusted performance. In category or peer group approaches, the reference used is the average performance, or the category's index, and therefore the risk-adjusted measure is a priori dependent on this classification. Thus, if the class is broad, it will group together different styles and the average index will not reflect the risks taken by the fund. The opposite is true if the class is narrow: the fund may have sought performance outside the category and, here again, the index does not represent the risk factors to which the fund is exposed. We determine the fund's benchmark using style analysis and we can measure the outperformance obtained by the manager (alpha). Generally, rating agencies consider that the investor is not interested in loss risk but only in the variability of returns (or volatility). This approach to risk is inadequate and does not respond to the expectations of the final investor. This is why the Style Rating takes into account the risk of extreme loss using the Value-at-Risk. Lastly, the third advantage of the Style Rating is that it takes into account performance persistence. The measurement of the recurrence of performance (gain frequency) and low variability (Hurst exponent) allows the element of luck to be eliminated from the results.

For each of these dimensions, the Style Rating is based on the most advanced conceptual and technical research, whilst at the same time guaranteeing the transparency of the ratings.

How does EuroPerformance, a leader in the French market, envisage its international development? Will this development be dependent on the success of the style rating on an international level?

Frédéric Picard: The Style Rating is the visible result of extensive work undertaken to modernise our information system. Thanks to the work of the Edhec research centre, we have succeeded in industrialising sophisticated statistical techniques in large databases with a high frequency of updates. The next step will be to extend our work to a wide population of European funds and provide access to this information through a specialised service offer. We will therefore be able to propose not only our ratings but also our analysis to European managers and multimanagers.

The Style Ratings were developed in partnership with Edhec based on academic research work. What were the main difficulties linked to the implementation of such a rating in a business context?

Frédéric Picard: There are numerous difficulties but the more reliable your information system is, the easier it is to develop sophisticated approaches. These techniques are very sensitive to errors in the calculation of returns and require a rigourous monitoring of net asset values and corporate events. We have set up numerous tests and we have retained higher robustness criteria than those generally encountered. Rating funds is an important task and we prefer not to attribute a rating than to do it badly.