Which metric is commonly used to assess the performance of an investment manager?

The tracking error is a widely utilized metric for assessing the performance of an investment manager, particularly in relation to a benchmark index. It measures the volatility of the return difference between the manager's portfolio and the benchmark. A lower tracking error indicates that the manager's performance closely aligns with that of the benchmark, suggesting effective management and consistency in investment strategy.

Managers who aim to replicate the benchmark's performance will typically work to minimize tracking error, as this demonstrates their ability to manage the portfolio in a manner that effectively tracks the desired index. Conversely, a high tracking error may indicate a significant level of active management—suggesting that the manager is taking on more risk to achieve potentially higher returns, thus diverging from the benchmark.

This metric is particularly relevant in the context of passive investment strategies, where the goal is often to mimic the performance of a specific index. For active strategies, tracking error provides insight into how much risk the manager is taking relative to the benchmark.

Other metrics such as net asset value, Sharpe ratio, and expense ratio, while useful in evaluating different aspects of an investment or a fund's performance, do not directly gauge the performance of an investment manager in relation to a benchmark as effectively as tracking error does.