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Using the Inalytics Peer Group database, our research paper illustrates how quantifiable skill can be identified in the investment process and confirms how behavioural biases impact performance.

Does investment skill exist?

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 fund managers able to consistently select stocks that outperform but are unable to identify stocks in their portfolio that are likely to underperform?

Defining and measuring investment skill

Using the Inalytics Peer Group database, this research paper 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 alpha generating decisions 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 research paper below to learn more about how Inalytics identify investment skill.

Contact us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.

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