Inalytics, a specialist in analysing investment performance, has launched a new data-driven model that helps asset owners see the difference between luck and skill when selecting managers.
The model, DECSIS, has been built over 20 year and analyses $22 trillion of trades in a database.
It uses data science to quantify the impact of the decisions that asset managers make when running the concentrated, bottom-up portfolios that dominate the investment landscape today.
It analyses the four core investment decisions and processes – or ‘alpha drivers’ – Inalytics has found to have the potential to generate alpha in equity portfolios: stock picking, sizing positions, trading activity and holding periods.
The result is that asset owners can see precisely where asset managers add or detract value, facilitating more efficient manager searches and better-informed due diligence and monitoring exercises, according to Inalytics.
The model can also be used as an evaluation and coaching tool by fund managers, providing them with granular insight into the decisions they need to improve to enhance performance.
“Traditional attribution models were introduced in the 1980s when portfolios typically had around 160 holdings and managers would allocate to a sector or region and then select the ‘best’ stocks within it,” says Rick Di Mascio, CEO of Inalytics.
He adds, “Our new data-based framework not only analyses the specific skills that drive returns today, it also quantifies their precise contribution to overall performance, showing asset owners exactly how good managers are at making the decisions that matter in modern investment portfolios.”
Di Mascio believes that “asset owners want to pay for skill not luck and we have seen a notable shift in demand for tools that help them more effectively and efficiently screen and monitor asset managers.
They want control and to have access to the metrics that tell them how a track record was actually generated, allowing them to ask managers the questions that really matter – and in some cases the ones they would rather not be asked.”