From October, our widespread fairness mutual fund screener (1000’s of our readers use it) will embrace the Ulcer Index as a parameter together with rolling returns, draw back seize, upside seize, trailing returns and normal deviation.
The Ulcer Index is a measure of draw back threat in actively managed mutual funds. It’s a easy solution to learn how traumatic it’s to carry a fund in comparison with a benchmark.
The usual deviation (volatility) is a measure of deviations from a median (month-to-month) return. Each constructive and detrimental deviations are accounted for. The Ulcer Index is outlined equally to plain deviation, however is predicated on drawdowns (the autumn from a peak) as an alternative of deviations from a median.
Suppose the utmost NAV over 2 weeks is Rs. 15 per unit. If the NAV decreases from this most, the Ulcer index worth will increase, indicating a rise in investor stress. If the NAV will increase additional, the index decreases, reflecting a lower in stress!
The Ulcer index is designed in such a manner that it penalises draw back (fall from the utmost) far more than different ratios. Peter Martin and Byron McCann first printed it of their e-book The Investor’s Information to Constancy Funds (1989).
Peter Martin describes the index on his web page: tangotools. The out-of-print e-book in PDF type will be discovered right here.
At the moment, just about everybody thought abdomen ulcers have been attributable to stress. We later got here to know that abdomen Ulcers are attributable to micro organism – a Nobel prize-winning discovery. In fact, the title Ulcer Index caught!
- The autumn from a peak is computed as a proportion change over 90 days. Though that is for much longer than the 2 weeks beneficial by Martin, the prolonged length ought to eradicate noise and be ample for the long-term investor.
- This proportion change is named a drawdown. We sq. this drawdown.
- We now compute a rolling 90-day drawdown squared and sum all the info.
- The foundation imply sq. of this sum is computed and is named the Ulcer Index. The Wikipedia Web page provides extra particulars. This provides the Ulcer Index for a given interval.
- Ulcer Rating: We compute this Ulcer index on a rolling 90-day foundation for every enterprise day for a benchmark and an energetic MF, and compute how usually the Ulcer index of the fund has been decrease than that of the benchmark. This is named the Ulcer Rating, additionally known as the rolling 90-day Ulcer index outperformance consistency. We will use this parameter in our screener.
Now, allow us to check out the ulcer index with a couple of mutual funds.
Whereas screening, I like to recommend checking for prime ulcer scores over 5, 7 and 10-year durations.
Take, for instance, the ICICI Prudential Giant & Mid Cap Fund – Direct Plan – Progress, compared with the Nifty 200 TRI.
The Ulcer rating, as talked about above, is the rolling 90-day Ulcer index outperformance consistency or how usually the Ulcer index of the fund is decrease than the benchmark.
| Length (years) | Ulcer Rating |
| 1 | 100% |
| 2 | 97% |
| 3 | 98% |
| 4 | 99% |
| 5 | 89% |
| 6 | 73% |
| 7 | 68% |
| 8 | 67% |
| 9 | 60% |
| 10 | 62% |
That’s fairly good draw back safety. However how about return efficiency?
| Length | Rolling Return Outperformance Consistency Rating |
| 1Y | 67% |
| 2Y | 69% |
| 3Y | 69% |
| 4Y | 60% |
| 5Y | 54% |
That’s not too shabby, aside from over 5 years.
To any extent further, we suggest that traders first display screen for funds with persistently excessive ulcer scores after which search for robust rolling return efficiency. Alternatively, our earlier advice of first in search of constant draw back seize after which rolling return efficiency nonetheless stands.
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