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There is only
a 50 per cent chance that fund managers get their decisions right,
according to research conducted by management selection and monitoring
firm Inalytics.
215 long-only
portfolios were examined and rated in two areas of manager skill:
hit rate, or the number of correct decisions as a percentage of
the total number of decisions; and win loss ratio, which compared
alpha generated from good decisions to that lost from poor ones.
Industry rule suggests that a 60 per cent hit rate would constitute
solid performance, yet Inalytics’ research shows that this
would actually constitute outstanding performance. The actual hit
rate average is 49.6 per cent.
However, fund managers compensate for this low hit rate with an
average win loss ratio of 102 per cent; therefore, the alpha generated
from good decisions is two per cent more than that lost from poorer
ones.
“Our research is a further step towards transparency within
the fund management industry,” said Rick Di Mascio, chief
executive and founder of Inalytics. “The measurement of Hit
Rates and Win Loss Ratios highlights how a manager generates alpha
and whether the track record can be relied upon as a useful indicator
of skill. It reinforces our attempt to steer investors’ focus
away from the track record towards an analysis of individual investment
decisions.”
Mascio added that these methods of measuring fund manager skill
are useful ways of identifying over- and underweight tendencies.
- Pensions
Age November 2008
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