In a recent report from OCIO Analytics, the firm presented the case that two endowment or foundation portfolios with similar asset allocations could see different investment performance, due in part to a wide dispersion between the best- and worst-performing alternative investment managers.
In a follow-up report, “The Dispersion Capture Ratio,” OCIO Analytics introduced a new metric—dispersion caption ratio—to evaluate how much of the available performance spread within a peer universe is captured by a portfolio.
DCR is calculated by starting with the difference between a portfolio’s return and 95th-percentile return. That number is then divided by the difference between 5th-percentile return and 95th-percentile return. The result is a portfolio’s DCR.
For the purposes of the equation, 5th-percentile return represents top-performing portfolios, and 95th-percentile return represents the lowest-performing portfolios.
Brad Alford, founder of OCIO Analytics and Alpha Capital Management, noted via email that institutional portfolios with similar objectives are producing materially different results, and asset allocation no longer explains the gap. The company intends DCR to be the first framework to measure implementation skill at the total portfolio level, expressed as a share of the observable opportunity set, Alford noted.
“This shift reframes a central question in institutional investing,” the report stated. “The focus is no longer only on where a portfolio ranked or how it performed relative to a benchmark, but on how effectively it converted opportunity into results. This framework applies to any institutional portfolio—regardless of whether it is managed by an OCIO, a consultant, or an internal team—and does not evaluate who manages the portfolio, but rather what the portfolio achieved relative to what was possible.”
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Tags: Manager selection