Information Ratio Explained: Elevate Your Investment Decisions in 2025

How do you know if your fund manager is actually adding value, or just riding the wave of the broader market? In the age of robo-advisers, low-cost ETFs, and volatile global conditions, Australians need sharper tools to separate genuine skill from luck. Enter the information ratio — a metric that’s helping both professionals and everyday investors make better decisions in 2025.

What Is the Information Ratio and Why Is It Crucial?

The information ratio (IR) measures how much excess return a portfolio manager generates relative to a benchmark, adjusted for the risk taken. Unlike the more familiar Sharpe ratio, which looks at returns per unit of total risk, the information ratio zeroes in on active risk — the risk taken specifically to outperform a benchmark, such as the ASX 200.

In formula terms:

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

This tells you how much extra return (the “information”) a manager delivers per unit of risk from deviating from the benchmark. A higher IR means the manager is delivering more bang for your risk buck.

In 2025, with a growing menu of actively managed ETFs and superannuation options, the IR is increasingly used by investment committees, advisers, and sophisticated retail investors to compare strategies. Regulatory scrutiny on performance reporting and fee transparency means that metrics like IR are front and centre in fund disclosure statements.

How the Information Ratio Shapes Investment Decisions in 2025

Australia’s investment landscape is evolving. The government’s Your Future, Your Super reforms have pushed super funds to justify active management fees. The IR is now a standard feature in many Product Disclosure Statements (PDS), helping Australians compare products on a level playing field.

Let’s look at two real-world scenarios:

• Superannuation Fund A claims to outperform the ASX 200 by 1.5% per year, but with a tracking error (volatility of returns vs. the benchmark) of 3%. Its IR is 0.5.

• Superannuation Fund B beats the benchmark by just 1% per year, but with a tracking error of 1%. Its IR is 1.0 — double Fund A’s, despite lower headline returns.

For investors, Fund B’s manager is adding more value for each unit of risk taken. In a market where risk control matters — as seen with 2024’s sharp swings in tech and resource stocks — that efficiency is gold.

In 2025, APRA’s performance test regime for MySuper and Choice super products means funds with low information ratios are under pressure to merge or reduce active risk, benefiting members who demand value for money.

How to Use the Information Ratio in Your Portfolio Decisions

Here’s how Australians can harness the IR for smarter investing this year:

• Compare actively managed funds: Don’t just look at past returns — check the IR to see who’s delivering consistent outperformance without taking excessive risk.

• Evaluate ETF strategies: With active ETFs on the rise, the IR helps you identify which managers truly add value over index-tracking products.

• Review your super: Use the IR in your fund’s PDS or annual report to assess whether higher fees are justified by skillful active management.

• Ask better questions: When meeting with a financial adviser or reading fund reports, ask for the IR alongside other metrics. A high IR (generally above 0.5) is a positive sign, but context matters — sector, style, and market conditions all play a role.

Remember, no metric is perfect. The IR can be distorted by short timeframes or market shocks, and it assumes a suitable benchmark. But as Australian investors demand more transparency and value, the information ratio is a vital part of the toolkit in 2025.

The Bottom Line: Make the Information Ratio Work for You

The information ratio is more than just financial jargon — it’s a practical lens for evaluating fund manager skill and portfolio efficiency. In an era of heightened scrutiny, regulatory change, and investment complexity, understanding the IR can help you cut through the noise and make more confident, data-driven decisions. Whether you’re comparing super funds, ETFs, or managed accounts, let the information ratio be your ally on the path to smarter investing.