Choose one of three large-cap funds from five years of data: returns of 14.2%, 13.1% and 15.0% against a benchmark's 12.5%, tracking errors of 3%, 1.5% and 7%, and fees of 1.6%, 0.9% and 2.1%. Which manager would you pick?

Abhay, with an information ratio of about 0.57, against 0.40 for Nishant and 0.36 for Udyan. Udyan returned most but took more than twice Abhay's active risk to do it. Nishant's small excess at 1.5% tracking error looks like a lightly active fund charging active fees. None of the three records is long enough to prove skill statistically, so the choice rests on process checks as well as the numbers.

Two drivers reach the same town; one took the motorway at the speed limit, the other overtook on blind corners and got there five minutes sooner. You would hire the first. A manager is paid to beat the benchmark, and the information ratioExcess return over the benchmark divided by tracking error, the volatility of that excess. It measures active return per unit of active risk. measures how much excess return each unit of active risk bought. Udyan's extra return came from taking far bigger bets away from the benchmark, and those bets could as easily have lost.

Less than it seems. The information ratio times the square root of the years gives a rough t-statistic, and a t of about 2 is the usual bar for believing the result is not luck. Abhay scores 1.27, Nishant 0.89 and Udyan 0.80: none is statistically distinguishable from a lucky manager. At Abhay's ratio it would take about 12 years of the same performance to reach a t of 2. The numbers rank the managers; they do not certify any of them.

Returns here are after fees, so the ratios already count cost. Fees still matter going forward because they are certain and the excess return is not. Nishant charges 0.9% for 1.5% of tracking error, which is close to an index fund with a small tilt, sometimes called a closet indexerA fund sold and priced as actively managed whose holdings stay so close to the benchmark that its returns barely differ from it.; the same exposure is available far more cheaply. Udyan's 7% tracking error in a large-cap fund suggests positions well outside the benchmark, perhaps in mid-sized companies; check that before crediting the manager with skill for what may be a size bet.

Choose Abhay, subject to three checks the numbers cannot do. Is the same manager still in charge who produced the five years? Has the fund's size grown so much that the approach no longer fits? And does the excess come from a repeatable process, or from one or two lucky sector calls? The information ratio decides the shortlist; the process review decides the pick. A committee that wants low cost and low risk over skill could reasonably choose an index fund over all three.