Mastering the Information Ratio: Smarter Investment Choices for Australians in 2026

The information ratio measures how much additional return a portfolio manager generates compared to a benchmark, after adjusting for the risk taken to achieve that outperformance. Unlike the Sharpe ratio, which considers total risk, the IR specifically looks at the risk taken to deviate from a chosen benchmark—often an index like the ASX 200.

Formula:

Information Ratio = (Portfolio Return – Benchmark Return) / Tracking Error

• Portfolio Return: The return generated by the fund or manager.
• Benchmark Return: The return of the chosen benchmark (e.g., ASX 200).
• Tracking Error: The standard deviation of the difference between the portfolio and benchmark returns, representing the volatility of active returns.

A higher IR indicates that a manager is delivering more excess return for each unit of risk taken relative to the benchmark. In other words, it shows how efficiently a manager is using risk to generate outperformance.

With the rise of actively managed ETFs, new superannuation regulations, and increased demand for transparency, the information ratio has become a standard metric in fund reporting. Many Product Disclosure Statements (PDS) now include the IR, making it easier for Australians to compare investment options on a consistent basis.

Regulatory changes and industry reforms have put pressure on funds to justify their fees and demonstrate value for money. The IR is particularly useful in this context, as it highlights whether a manager’s outperformance is achieved efficiently or simply the result of taking on more risk.

Consider two hypothetical superannuation funds:

• Fund X outperforms its benchmark by 1.5% per year, with a tracking error of 3%. Its IR is 0.5.
• Fund Y outperforms by 1% per year, but with a tracking error of 1%. Its IR is 1.0.

Although Fund X has a higher absolute return, Fund Y delivers more excess return per unit of risk. For investors, this means Fund Y’s manager is using risk more efficiently to generate outperformance.

In a market environment where risk management is crucial, especially after periods of volatility, the IR provides a clearer picture of manager skill than raw returns alone.

1. Comparing Actively Managed Funds

When reviewing actively managed funds, don’t focus solely on past returns. The IR helps you see which managers are consistently delivering outperformance without taking on excessive risk. A higher IR generally suggests better risk-adjusted performance, but it’s important to consider the investment style and market conditions.

2. Evaluating ETF Strategies

With more active ETFs available, the IR can help you distinguish between managers who genuinely add value and those who simply take on more risk. Comparing the IR of different ETFs can guide you towards options that balance return and risk more effectively.

3. Reviewing Your Superannuation Fund

Super funds often report the IR in their annual statements or PDS. Use this metric to assess whether higher fees for active management are justified by the manager’s ability to generate risk-adjusted outperformance. If your fund’s IR is consistently low, it may be worth considering alternatives.

4. Asking Informed Questions

When meeting with a financial adviser or reviewing fund reports, ask about the information ratio alongside other performance metrics. While a higher IR is generally positive, remember that context matters—different sectors, investment styles, and time periods can influence the IR.

While the IR is a valuable tool, it’s important to recognise its limitations:

• Benchmark Selection: The IR is only as meaningful as the benchmark chosen. An inappropriate benchmark can distort the results.
• Short Timeframes: The IR can be misleading over short periods, as market shocks or unusual events may skew the data.
• Market Conditions: The IR may not fully capture the impact of changing market environments or structural shifts in the economy.

For these reasons, the IR should be used alongside other metrics and qualitative factors when making investment decisions.

Recent reforms in Australia’s superannuation sector have increased the focus on performance and value for money. Regulatory bodies now require funds to demonstrate that they are delivering benefits to members, not just charging higher fees for active management. The information ratio has become a key part of this assessment, helping both regulators and investors identify funds that use risk efficiently.

Funds with persistently low IRs may face pressure to merge, reduce fees, or adjust their investment strategies. For members, this means greater transparency and a stronger focus on outcomes.

The information ratio is more than just a technical statistic—it’s a practical way to assess whether a fund manager’s outperformance is worth the risk. By incorporating the IR into your investment review process, you can:

• Compare funds on a risk-adjusted basis
• Identify managers who deliver consistent value
• Make more confident decisions about where to invest your super or other savings

Remember, no single metric tells the whole story. But in an environment where Australians demand more transparency and better outcomes, the information ratio is a valuable addition to your investment toolkit in 2026.

As the investment landscape continues to evolve, Australian investors need reliable ways to assess fund manager performance. The information ratio provides a clear, risk-adjusted measure of outperformance, helping you cut through headline returns and focus on real value. Whether you’re reviewing your super fund, comparing ETFs, or considering managed accounts, understanding the information ratio can help you make smarter, more informed choices for your financial future.