Only 18% of fund managers make the correct decision a majority of the time while the best manager made the right decision just 55% of the time, according to a new research paper by Essentia Analytics.
It also found that 82% of managers had ‘positive payoffs’, meaning their good picks outperformed their bad ones, all else being equal.
The Essential Behavioural Alpha Benchmark, which analysed 76 portfolio managers, incorporates seven key metrics to assess fund managers: stock picking, entry timing, sizing, scaling in, size adjusting, scaling out and exit timing.
The assessment is the first of its kind and will allow investors to look beyond a manager’s historical performance and risk tolerance and determine how good their managers are at the real-world skills needed to produce strong future performance.
The research showed that 58% of portfolio managers added value through their stock-picking decisions. However, a majority of managers destroyed potential returns by making poor decisions when sizing a position.
Only 38% of respondents added value when determining how big a position should be.
Clare Flynn Levy, founder and CEO of Essentia Analytics, said, “The ability to prove the extent to which an active fund manager is skilled has been a sort of holy grail for investors.”
She added that the tool “represents a sea-change in the industry – one that will ‘raise all boats’ for investors and managers alike.
Highly-skilled active fund managers can finally demonstrate their value over passive index funds, and managers who have not yet achieved a high skill level have clarity on what they can do to continuously improve.”
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