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The key drivers that led to the introduction of the Annual Ratio methodology follow:
Not all firms can provide the daily per share effect of the expenses on a historic basis. Given today's technology and data storage practices, it is reasonable to assume the daily per share effect can be provided going forward. However, firms with older products cannot always provide that information. This has prevented several clients from being able to use Eagle Performance to calculate gross returns for their funds. Conversely, virtually all firms can reasonably be expected to provide a fund's annual expense ratio history. The annual expense ratio is the only input (besides NAV's or Unit Prices) required to calculate a gross return using the Annual Ratio methodology.
The methodology and formulas that comprise the gross (Annual Ratio) return calculation are widely known, frequently used, and commonly accepted within the mutual fund industry. Many firms use internally built spreadsheets that also rely on annual ratios to gross up returns. Eagle also provides the Annual Ratio methodology. Eagle was the only example of a gross methodology that used daily per share data points as the primary input to the gross return calculation. Eagle offers a methodology that is widely understood and commonly accepted.
The Annual Ratio method is easier to support from a client's perspective. The annual expense ratio only needs to be entered into Eagle Performance on a change date. In contrast, the per share method requires a value to be input every day. For example, assume that the expense ratio from 1 year ago needs to be restated from 1.5% to 1.4%. The Annual Ratio method merely requires a single change to the entity history record (change 1.5% to 1.4%). Conversely, the Per Share method first requires recalculating the per share amount for each and every day based on the new expense ratio. Then it requires changing each day's NAV record to reflect the updated amount.
Recent analysis suggests that the Annual Ratio methodology can support the gross of expense performance requirements for non-U.S. funds. The calculation breaks down the annual ratio into a monthly ratio based on actual day counts for each month. This approach is more typical of the gross return requirements for funds domiciled outside of the United States.