Fund managers nail half of investment decisions

Fund managers only get half of their investment decisions right, according to a new research report by the London-based consultancy Inalytics.

Inalytics (Asia/Pacific) managing director, Amanda Field, said the report, which analysed 215 equity portfolios with a combined value of $US152 billion, finds that fund managers typically only have hit rates — whether an investment decision adds value — of 50 per cent and that even good managers only have hit rates of 51 per cent.

Field said, “the typical manager, however, compensates for a mediocre hit rate by generating good gains from the winners that offset the losses from the poor decisions”.

“This is represented by the win-loss ratio where the industry average is 100 per cent and a good ratio is about 110 per cent. That means the alpha from good decisions is 10 per cent more than that lost from the poorer ones.

“These measures of hit rates and win loss ratios help establish how a manager generates alpha and whether the track record can be relied upon as a useful indicator of skill.”

The report says that hit rates are based on the adage that “if you get six out of 10 decisions correct you’ll do a good job”.

The hit rate is only half the story when assessing a manager’s skill. The win-loss ratio compares the alpha generated by the good decisions to the alpha lost from the poor decisions.

Field said: “The report finds that where fund managers exhibit skill, it tends to be derived from their ability to find the real winners as demonstrated by the average win-loss ratio of 102 per cent.

The report also argues that experience shows that fund managers’ track records are poor guides to the future as they say little about the skills that generated the results, or if they are likely to be repeated in the future.