/ Research Paper 04: Separating Luck from Skill

Luck vs Skill in Investment

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

The research

This paper analyses 62 Australian 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
  • Lessons can be learned from the Australians’ understanding of investment skill when selecting managers

Given that two thirds of 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 you look closer, it’s clear that certain behaviours are driving this result (and perhaps even luck), as opposed to good stock selection and investment techniques.

The Findings

Based on Inalytics’ measures of investment skill; Hit Rates and Win Loss Ratios, we found that Australian managers’ levels of skill are in fact very similar to those for the rest of the global industry.

This was betrayed by our findings that a significant proportion of the outperformance came from the underweights. We noticed that instead of the usual normal distribution of over and underweights at the sector level, there was an extraordinary coincidence of view in Real Estate Investment Trusts (REITs).

Our further analysis shows that, when it comes to identifying real investment skill and selecting managers who understand how to improve investment portfolios through quality investment technique, it’s crucial to look much more closely at investment process and investment decision success rate.

Download the full study to find out more, or contact us to learn more about our investment skill analysis offerings and how we can improve your investment process today.

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