Fri, Apr 27, 2018
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Specialist manager evaluation firm Inalytics’ research highlights the fallacy of track records

Tuesday, May 24, 2011
At a time when fund manager performance is scrutinised more closely than ever, research from Inalytics, the specialist manager evaluation firm, has found that fund managers with no significant skill in stock-picking have still been able to outperform the market. The research stems from the mistaken industry belief that Australian fund manager skill levels, and therefore track records, are superior to their global industry peers. Carried out on a sample of 62 Australian long only portfolios, representing over half of the industry, the study saw 42 managers (67%) outperform the standard Australian equity benchmark, the ASX 300, between 30 April 2006 and 31 December 2010.

A significant proportion of the outperformance was generated from the underweight stocks; a highly unusual situation and one commonly associated with luck rather than that of skill. Of the managers that outperformed, 11 saw a greater gain from the underweights than their actual stock picking.

The Hit Rate (the percentage of decisions that a manager gets right) for Australian managers was 49.9%, marginally above the 49.5% recorded for their global peers, suggesting that although their performance track records are clearly superior to the rest of the world, skill levels are comparable between the two. The data also revealed a Win-Loss Ratio (whether good decisions generate enough return to offset poor ones) of 104.9% for Australian managers, as opposed to 109.6% for the global peer group. Seven managers even outperformed despite showing no skill in stock-picking. Further analysis of the 42 Australian managers that outperformed revealed that:

  • 39 managers had positive contributions from the underweights;
  • In 11 portfolios, the contributions from the underweights exceeded the overweights;
  • In 7 portfolios, the contributions from the overweights were negative.
A high level of the outperformance contained within the findings was generated from positive performance from underweight stocks. Furthermore, a significant reason for this outperformance was discovered to result from the extraordinary coincidence of view in one sector, that of real estate investment trusts (REITs), an asset class that underperformed over the period. Out of the 62 manager sample, all except two were underweight in REITs through the period under review.

Commenting on the results, Rick Di Mascio, CEO and founder of Inalytics, said: “These results show that there is a marked difference between the track record of a manager and their level of skill; this research separates the two for the first time. The skill of a manager is inherent while track records really can come and go. As a result, skilled managers can underperform and less skilled managers can outperform. To confuse track record and skill would be a mistake for asset owners.

“Two-thirds of Australian managers outperforming their benchmark is a good result by any standard. However, performance is not quite at the level that anecdotal evidence and even the initial numbers suggest. Our study found that both decisions on overweighted and underweighted stocks have added value to portfolios. This is interesting as many fund managers will charge significant performance fees relative to the index, yet their outperformance is coming from a decision to be underweight in a particular sector, rather than good stock selection. Our conclusions from this research would suggest that while there is skill, it is not nearly as unique or strong as tracks records initially suggest. The level of skill is in fact broadly in line with their global peers.”

Source

Press Release

BC

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Investing - Sequoia takes Facebook stake as shares slide in data controversy, $1.4b hedge fund sees intact fundamentals for Facebook, Jim Cramer reveals some 'suggested hedge fund trades' amid the Trump tariffs[more]

    Sequoia takes Facebook stake as shares slide in data controversy From Bloomberg.com: The $4.2 billion Sequoia Fund bought a small position in Facebook Inc. as the stock slid late in the first quarter, investment manager Ruane, Cunniff & Goldfarb told clients. "The recent controversy enab

  2. Activist Investors - Blue Sky-owned Wild Breads faces uncertain future[more]

    From AFR.com: A Blue Sky private equity investment in artisan-style baker Wild Breads enjoyed multiple valuation upgrades despite losing millions and breaching its lending covenants, accounts lodged with the regulator last week show. Wild Breads lost $2.4 million in 2017, but Blue Sky ascribed a hig

  3. Opalesque Exclusive: Barnegat to close hedge fund to outside investors on weak opportunities[more]

    Komfie Manalo, Opalesque Asia: Bob Treue's Barnegat Fund Management said it is closing its $666m fixed income relative value hedge fund to outside investors. "The negative side to gains in Fixed Income Arbitrage is that unless we find new opportunit

  4. Investing - Hedge fund makes a big bet on malls, British hedge fund manager Odey short UK government bonds on QE bet[more]

    Hedge fund makes a big bet on malls From Barrons.com: The dominant narrative on American shopping malls is that they're dead. Crushed by Amazon.com, many brick-and-mortar retail stores are destined for bankruptcy. And where is the most retail, clustered all together? Malls. From a

  5. Performance - Hedge funds suffer first back-to-back loss in two years, Netflix performance burns hedge fund short sellers, Macro hedge fund up 14.5% in first quarter sees dollar falling, Renaissance Technologies rebounds across hedge funds in March[more]

    Hedge funds suffer first back-to-back loss in two years From Bloomberg.com: Hedge Fund returns sank for a second straight month in March, the first back-to-back loss since the first two months of 2016, as trade wars, tech-sector woes and a Fed rate hike dragged down the S&P 500 from its