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Stop Press: Fund Managers Have Skill: Inalytics

Date: Tuesday, April 17, 2012
Author: Brian Bollen's Blog

Contrary to what some cynics might think, fund managers do possess skill. At least, that is the gospel according to Inalytics, the specialist manager evaluation firm. It says that research it has carried out shows that skilful managers have three characteristics; they get more than half their decisions right, are able to run their winners and finally cut their losers. It adds that the second of these characteristics is worth 5% per annum.

The research was carried out on 760 equity portfolios from around the world and presents empirical evidence on the distribution of hit rates. It demonstrates how significant winners are to generating performance, and that those with this skill significantly outperform those that do not. A ‘winning’ stock is defined as

a stock owned in the past, that added value, and then continued to be held and added value once again.

The top two quartiles of managers returned an average annualised performance of 242 bps and 102 bps above average. By comparison, unskilful managers in the lower two quartiles returned -101 bps and -238 bps; a difference of nearly 480 bps at the lower end.

Rick Di Mascio, CEO and founder of Inalytics, says: “The fund management industry often talks about its ability to run winners but we know from previous research that Managers tend to sell their stocks too early. As far as we know, this is the first time anyone has established evidence to support the proposition that some Managers are skillful.”

We are promised that this research is the first in a series of papers the firm is undertaking on the nature of skill and follows on from the firm’s previous research papers into the behavioural biases exhibited by stock-pickers.