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Dragon Ratings Guide

 

Concept
Financial Express Dragon Ratings are compiled using three key measurements of a fund's performance: alpha, volatility, and consistency, and are applied to fund sectors as defined by the IMA and the ABI. Each sector will group funds on the basis of these 3 factors, and thus produce a segregation consisting of 3 different pools of funds within each sector. The funds are then given a rating, with the best performers possessing a 3 dragon rating, and the worst a 1 dragon rating.
The definitions and reasons behind the chosen inputs are as follows:
Alpha
A measure of the fund's returns against its benchmark. It is the loss or gain the fund has posted when the benchmark return is assumed to be zero. This measure is used to see if the fund can provide superior excess returns to that of the benchmark, hence a key input in evaluating whether the fund has outperformed.
Volatility
A measure of the degree to which the fund's periodic returns vary either side of its mean return. The larger the fluctuation, the more risky the fund is. This measure is used to see how much risk investors take when entering a fund, in order to make the ratings useful on a risk-adjusted basis.
Consistency
A measure that tracks the nature of a fund's overall return. This measure is used to address whether the returns were achieved steadily over time, or whether the fund had an abnormal gain over a short period that has skewed performance up, i.e. loss-making periods were offset by a large atypical gain.
The Dragon Ratings purely add the three measurements to arrive at the Dragon value. The combined values are ranked, and ratings are assigned according to where the fund falls within its sector.
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