This is a follow up to the prior blog post where an example Sortino Ratio calculation is displayed. The reason for selecting the Franklin portfolio is that it holds the shameful position as the poorest performing portfolio. What is the Sortino Ratio of a portfolio that is off to a rocky start?
The Franklin is not one year old and portfolio performance varies widely when monthly periods are selected for the calculation. I prefer to use quarterly periods, but this results in insufficient data points to make it worthwhile if the Franklin is the “lab rat.”
Sortino Ratio Calculations for Volatile Franklin
The MAR or Minimum Acceptable Return is a percentage selected by the money manager. A useful figure is to use is a three-year rolling average of a U.S. Treasury such as TLT. One might select a benchmark percentage for the MAR. I use 3.0% for this example.
As mentioned above, to increase the number of data points I selected monthly periods rather than the desired quarterly periods. Column C illustrates to return volatility. While readers cannot see the underlying equations, the video in the last post shows how to calculate the Sortino Ratio. At some point I can send interested readers a workbook that includes the Sortino tab where the equations are visible. I’ll likely include the original example so one can use it as a reference – making sure the equations are correct.
The upshot of this blog is the following. Despite the poor performance of the Franklin, it still is managing a positive Sortino Ratio. Anything above zero is good. Obviously, more data is needed to support this claim, but for now, the Franklin is not in as bad a shape as the IRR indicates.
The Franklin began with a deposit of $500 and another $8,500 to $9,000 was added at different intervals. It is now over $10,000. Depending on when those deposits occurred and when the money was invested has a tremendous impact on the Internal Rate of Return (IRR) values.
As always, comments and questions are welcome.