Batting Average : Baseball and Mutual Funds?

May 21, 2021

When you hear the words batting average, the first thing that probably comes to mind is America’s pastime, baseball. You are certainly correct in first thinking of baseball, but did you know that the batting average statistic can also be used to examine a mutual fund?

In the world of mutual fund investing, a mutual fund’s batting average refers to a fund manager’s ability to beat a benchmark, such as the S&P 500. The statistic is calculated in a similar manner to a baseball player’s batting average; dividing the number of days a manager beats the benchmark by the total number of days in the designated period.

While looking at the batting average in both baseball and mutual fund investing can give insight into the performance of a player and fund manager, it does not tell the whole story.

Let’s start with baseball. Batting average only looks at a player’s ability to get a hit. It does not capture a player’s ability to draw a walk or the type of hit (single, double, triple, or home run). For example, player 1 may draw a walk, hit a home run, and fly out to center field and player 2 could hit one single and strike out. Both players finished the game 1-2 with a .500 batting average, but player 1 reached base twice and produced a run for his team with an extra base hit, while player 2 only reached first base once. If you were attempting to determine which player was more valuable to their team by using batting average, you may conclude that they both provided the same amount of value, but that is not the case.

Due to the limitations of the batting average, front office executives and analysts use OPS (On-Base Plus Slugging) to better gauge a player’s performance due to its ability to measure how often a player gets on base and the productivity of the batter when they do get on base by adding more value to extra base hits. OPS gives a more well-rounded view of how much value a player provides to the team.

Now, on to mutual funds. A fund manager’s batting average does not account for the risk he or she is taking in order to achieve the mutual fund’s returns. The statistic also does not capture the scale of the mutual fund’s outperformance/underperformance. For example, a fund manager may have a batting average of 75%, meaning he or she outperforms the benchmark 75% of the time, which sounds great! The problem is, the manager may be taking a lot of risk to do so, which could be exposing the fund to a large degree of volatility. If you have a low risk tolerance it would certainly be important to limit your mutual funds’ volatility. In terms of scale, this manager’s 75% batting average may not show that they underperformed the benchmark by, let’s say, 20% and only beat the benchmark by 1%. Even though the fund manager normally beats the benchmark, they did not provide very much added value, but when they underperformed the benchmark, the mutual fund significantly underperformed.

Due to its limitations to assess scale and risk, the use of the Sharpe Ratio and Alpha can give more insight into the performance of a mutual fund. The Sharpe Ratio measures a mutual fund’s return per unit of risk and can give a more accurate assessment of a mutual fund’s performance based on the amount of risk the fund manager is taking to achieve the mutual fund’s returns. A mutual fund’s Alpha is the excess return that a mutual fund provides over a benchmark and can give more insight into the scale of a mutual fund’s performance.

Now, the next time you look at a box score and see the batting average statistic, you may just think of your investments too. Don’t be afraid to look deeper into some of the stats, as a player’s or mutual fund’s true value may not be clear with just the standard batting average.

 

Investors should consider the investment objectives, risks, charges, and expenses of any mutual fund carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.

(05/21)