/ CFA Paper – Does Investment Skill Exist?


Does investment skill exist? If so, what is investment skill? Traditionally, academics and regulators have hunted for evidence of its existence in industry wide databases of track records. This approach has proved inconclusive and the debate over the existence of investment skill continues.

In this paper, we prove the existence of investment skill in fund management by showing how it can be measured by analysing the investment process and strategy alongside performance. Importantly, we don’t rely on track records to prove the existence of investment skill.

Our findings reveal that investment skill exists in a concentrated subset of portfolio managers who are defined by their ability to persistently find winners.


The Research

In sport, elite athletes and sports teams use sophisticated data analysis to examine and interrogate every aspect of performance and training to determine whether the outcome was a result of luck or skill.

This discipline is possible in analysing fund management. The investment process and decisions can be captured and analysed to understand how alpha was generated and how it was lost. By analysing investment behaviour and the success of individual investment decisions, we can establish a link between the strength of the investment process and investment performance.

In this study, we have used data to conduct an analysis of the decisions that elite portfolio managers take, how successful they are at taking them and what a typical portfolio of an elite manager looks like.

Our investment analysis is based on our peer group database of 389 equity portfolios. Our peer group database is populated by over 8 years of data collected from a broad spread of equity managers.. It comprises well over 100 million individual investment decisions, making it one of the largest private databases of investment decisions of its kind.

The Findings

Through our analysis of this data, we found that in 60% of months, these top performing equity managers buy stocks that go on to outperform over the subsequent 12 months. In effect, they persistently make winning investment decisions over time.

We also found that good decision making when buying isn’t the whole story; it is also necessary to add value through stocks a manager chooses to hold. When we look at whether successful decision making produces outperforming portfolios, we see that these elite portfolio managers’ stocks generate alpha, significantly higher than a random outcome of 50/50 based on chance.

We also explore a number of other observations, including the difference between portfolio managers specialising in Developed or Emerging Markets and the regional distribution of investment skill.

Our analysis of investment behaviour, investment process and investment strategies shows that:

  1. Investment skill exists, and that this ability can be captured and measured by examining the investment process in more detail.
  2. There is a cohort of portfolio managers who are able to select stocks that outperform with high levels of persistency and skill.
  3. This skill is highly concentrated in an elite subset who have a high active share.

A copy of the white paper is available for download below.

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