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Investment skill exists. Academic research has conclusively proven that portfolio managers have the skills to select stocks and build portfolios. We’ve seen that even underperforming managers are able to analyse stocks and demonstrate investment skill. However this creates a conundrum – if outperformance doesn’t necessarily indicate skill and underperformance doesn’t indicate a lack of skill, how can portfolio managers effectively evaluate their investment process? Why are some managers able to consistently select stocks that outperform but are unable to identify stocks in their portfolio that are likely to underperform?

This paper uses Inalytics Peer Group Database of 41 portfolios and analyses the impact of investor behaviour on investment performance by addressing:

  1. Do investment decisions generate alpha?
  2. Is the sizing across different stocks in the portfolio efficient so that the larger positions generate greater alpha?

The importance of the first question is self-evident, however the second question is crucial as it isn’t sufficient for portfolio managers to be able to generate good ideas and identify winning positions; they need to be sized correctly with conviction.

Download the full study to learn more about how we go about identifying investment skill or contact us to learn more about how we analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.

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