/ Research Paper 04: Separating Luck from Skill

Luck vs Skill in Investment

Australian equity managers have enviable track records and there is a long held belief that these track records, and consequently levels of investment skill, are superior to their peers around the globe. But is this really the case?  Through our proprietary investment analysis, we conclude that track records do not necessarily equate to skill and therefore do not define what makes a successful equity manager.

Our Research

This paper analyses 62 Australian equity portfolios (of which no fewer than 42 outperformed the ASX during the study period) to determine whether:

  • their success comes down to skill as opposed to luck in investment decision making;
  • lessons can be learned from a deeper understanding of investment skill when selecting portfolio managers in the Australian market.

Given that two thirds of portfolio managers in our sample outperformed their benchmark, there is reason to believe from these highly unusual results that high levels of skill may be a factor in their investment success rates.

However, when we looked closer it became clear that certain behaviours and perhaps luck are driving this result, as opposed to good stock selection and investment decision making.

Our Findings

Based on Inalytics’ Measure of Skill, hit rates and win/loss ratios, we found that Australian portfolio managers’ levels of skill are in fact very similar to those of their global peers.

This was evidenced in our findings that a significant proportion of outperformance came from underweight positions in these portfolios. We observed that instead of the usual normal distribution of over and underweights by sector, there was a significant overlap in the portfolio managers’ views on Real Estate Investment Trusts (REITs).

Our further analysis showed that when it comes to identifying real investment skill and selecting portfolio managers who understand how to improve investment performance through successful decision making, it’s crucial to look much more closely at the investment process and the success rate of individual investment decisions.

Download the full study to find out more or contact us to learn more about how we measure and rank investment skill and how we can help improve your investment process and select better portfolio managers.

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