Manager skill adds 5% to fund’s value, says Inalytics
Successful fund managers add 5% to the value of a fund, says Inalytics, a specialist manager evaluation firm.
Inalytics has published evidence that for the first time quantifies the value a skillful fund manager adds to the fund. According to its research, successful fund managers are identified by three characteristics. They are: successful managers get more than half their decisions right; they are able to run their winners; and they know when to cut their losers. Inalytics has shown that the second of these characteristics is worth 5% p.a
The research was carried out on 760 equity portfolios from around the world and presents empirical evidence on the distribution of ‘Hit Rates’, the number of correct decisions as a percentage of the total number of decisions.
The research 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.
According to the Inalytics system, the top two quartiles of managers returned an average annualised performance of 242 bps and 102 bps above average. By comparison, unskillful 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, founder and chief executive of Inalytics, said: “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.”
This research is the first in a series of papers Inalytics is undertaking to publish on the nature of skill, and follows on from the firm’s previous research papers into the behavioural biases exhibited by stock-pickers.