Research Paper 15: Behavioural Finance Profile
Breathing Life into the Arcane World of Behavioural Finance.
In this study we test the academic literature by challenging some well-known biases against our Inalytics Research Database to see if they actually exist in practice and their impact on portfolio returns, with some interesting outcomes
Click here to download the research paper and find out more about behavioural bias
Contact Us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.
Research Paper 14: Investment Skill: Does It Exist and What Does it Look Like?
Skill: Gone the Way of the Dodo?
Investment skill is the raison d’être of the asset management industry, managers sell it and clients pay for it. In spite of this, empirical evidence of its existence, and what it looks like in practice, is sparse; in fact there is a mountain of words, papers and opinions arguing that it’s as likely to be spotted as the extinct dodo.
This paper seeks to fill that gap: using the Inalytics’ database we show that there are skilful managers who generate alpha in excess of fees, and more importantly the specific elements of their investment processes that generate that alpha.
“Thing of beauty” might be a touch poetic, but a dodo it clearly isn’t.
Access the full research paper here.
Contact Us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.
Research Paper 12: Research: The Foundation for Alpha
Investment skill and the research process
The research process is the first building block in the investment process and a key metric of investment skill; it is where ideas are generated and fight for a position in the portfolio. The importance of research is undoubted. However, what is the relationship between successful decision making in the research process and the ultimate goal of alpha generation?
Using the Inalytics Peer Group, we uncover the relationship between decision-making success in the research process and alpha generation. This paper furthers our understanding of investment skill and reveals why it is essential for asset owners to assess the effectiveness of the research process in conducting due diligence. For asset managers, it provides a new way to analyse their investment process when it comes to idea generation and alpha generation.
What evidence have Inalytics used?
This analysis of the importance of the research process uses the Inalytics Peer Group, our proprietary database of active equity portfolios, 370 of which had sufficient length of data available for inclusion in this study. These portfolios represent a broad range of mandates by geography and region, as well as by market capitalisation and style tilts.
Findings were complemented by a recent review of 26 fixed income credit portfolios. Although the sample is small, the results remained remarkably consistent.
Access the full research paper here to view the results of our analysis on the link between a successful research process and alpha generation.
Contact us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.
Research Paper 11: Selling over Earnings Announcements
Investment skill in selling decisions
Inalytics co-authored academic paper, Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors, uncovered the alpha destroying trend of poor selling made by fund managers.
An additional insight of the paper was that selling decisions made after earnings announcements were significantly better than when taken randomly. In this research paper, we drill down further to explore the characteristics behind these investment selling decisions using both our analytical framework and the Inalytics Peer Group database.
What data have Inalytics used in the analysis?
In this study we analyse 271 portfolios from the Inalytics Peer Group database that have daily trades and where the overweights have added value.
To test the hypothesis that selling decisions taken in response to earnings announcements are more successful, we analysed the data in two ways to see if:
1. The proportion of portfolios that added value from these selling decisions is higher than for the Inalytics Peer Group as a whole.
2. Then for each portfolio we investigated whether this subset of selling decisions was more successful than selling as a whole.
Access the full research paper here to view the results of our analysis that the investment strategy of selling decisions made after earnings announcements is successful.
Contact us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.
Research Paper 10: Track records luck or skill?
Separating luck from skill
It is often thought that Napoleon said “Give me lucky generals” implying that he didn’t mind being lucky if it meant that he still won the battle.
In fact, Napoleon was almost certainly misquoted. It is more likely he was quoting Cardinal Mazarin, who noted that one must not ask of a general; “is he skilful?”, but rather “is he lucky?”
Clearly the consequences of relying on luck in investment are not as significant as in war, but nevertheless, it can be costly.
A second instance where we seek to separate luck from skill, in this research paper we identify the risks in assuming that track records and investment skill are one and the same.
What evidence have Inalytics used?
This research paper is based on 96 global emerging market (GEM) equity portfolios analysed by Inalytics as a part of an asset manager selection exercise.
Portfolio manager data for the selection and analysis comprised of at least 5 years of monthly holdings data, whilst the broad selection criteria ensured that there was a wide range of portfolio managers and investment styles analysed. The breadth and diversity of asset managers included in the search give us a high degree of confidence in the robustness of our analysis and results.
Access the full study here to view our analysis of how to determine luck from skill in the investment process.
For further insight into how data analytics can be used to make the due diligence process during asset manager selection more efficient, listen to episode 6 of our Analysing Investment Skill Podcast.
Contact us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.
Research Paper 09: Does it pay to own companies that do the right thing?
The value of good governance
Does the relationship between a company’s market capitalisation, its corporate governance and its share price return stand the test of time?
A key question skilful portfolio managers should be asking in the decision making process, our latest research paper examines the potential performance benefits for investors when considering good corporate governance, and how this is affected by company size.
What data have Inalytics used in the analysis?
Using a comprehensive set of Governance Risk Ratings from a leading corporate governance advisory consultancy, our earlier Research Paper 08: Does it pay to own companies that do the right thing? tested our thesis across two years of data. In Research Paper 09’s updated analysis, Inalytics conduct a more rigorous review across five years of data.
Access our full research paper here to view the results of our analysis on the value of good corporate governance.
Contact us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.
Research Paper 08: Does it pay to own companies that do the right thing?
Does strong corporate governance lead to outperformance?
Does it pay to own companies that do the right thing? Or is it as St. Augustine famously said, “Lord, make me pure, but not yet”.
This research paper puts the moral question to one side and addresses it from a more prosaic or secular perspective by analysing whether the share prices of companies with good governance outperform the market, and by extension if poor governance is associated with underperforming share prices.
What data have Inalytics used in the analysis?
Inalytics analysed a comprehensive set of Governance Risk Ratings from a leading corporate governance advisory consultancy, to show that it pays to invest in companies that do the right thing.
We tested the proposition that the share prices of the companies with low levels of governance risk, perform better than those with high levels, as well as analysing the data in terms of the differences between large and small companies. Finally, by analysing portfolio exposures, we questioned whether some asset managers are more equal than others when assessing governance risk.
With analysis across two years of data, in our subsequent Research Paper 09: Does it pay to own companies that do the right thing? we conduct a more rigorous review across five years of data.
Access our full Research Paper 08 here to view the results of our analysis on the value of good corporate governance.
Contact us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.
Research Paper 07: Skill + Risk = Winner
Client inspired research
The first in a series of papers addressing interesting questions posed by Inalytics’ clients; Nick Greenwood, Pension Fund Manager of The Royal County of Berkshire Pension Fund asked:
"Do highly concentrated portfolios perform better than more diversified ones?"
A portfolio strategy where risk and skill play a key role, our investment behaviour analysis seeks to look beyond the data to provide possible rationales for the observations.
What data have Inalytics used in the analysis?
Using the Inalytics Peer Group database, in this study we analysed some 599 equity portfolios with a wide variety of mandates; providing us with the opportunity to investigate interesting investment skill topics such as this.
The database was divided into quartiles, based on the number of holdings (average of each portfolio’s month end numbers). We then investigated the relationship with the subsequent performance of the portfolio.
Access the full research paper here to see the results of our findings and learn more about whether a highly concentrated portfolio is more likely to perform well.
If you would also like to suggest a topic of general interest, please contact us and we would be delighted to see if we could investigate it.
Research Paper 06: Evidence of Skill - UK Local Authorities
Identifying investment skill
Over the years, Inalytics has developed a clear sense of what characterises investment skill and a set of metrics to capture it. This research paper analyses a cross section of the portfolio managers used by UK Local Authorities.
Focusing on decisions and not track records, our research analyses the distribution of Hit Rate and Win/Loss Ratios and investigates these measures as a quantifiable indicator of investment skill.
What data have Inalytics used in the analysis?
Using the Inalytics Peer Group database, in this study we analysed contributions from 23 UK Local Authorities and 82 individual portfolios.
Access the full research paper here to view the results of our analysis of UK Local Authorities using the Inalytics monitoring service.
Contact us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.
Research Paper 05: Running Winners
Finding a winning stock may be easy for some. However, recognising that it is a winner, and having the conviction to run it, is considerably more difficult for all but the most skilful investment managers. Contrary to conventional thinking, the overwhelming majority of fund managers do not run their winners. They do the opposite, and sell stocks too early due to an over-riding tendency to “bank their profit”.
The power of letting winners run
This research paper demonstrates that investment skill exists, introduces a way to identify it, and shows that there is almost 500 bps pa difference between the performance of portfolio managers who have skill, and those who do not. This means that asset owners and asset managers can objectively measure investment skill over the long term.
What data have Inalytics used in the analysis?
Using the Inalytics Peer Group Database, in this study we analysed 760 equity portfolios from around the world.
Access the full research paper here to see the results of how we measure investment skill in portfolio managers who let winners run.
Contact us for further information about how Inalytics analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.
Research Paper 04: Separating Luck from Skill
Separating luck from skill, in this study we provide evidence that even fund managers with no skill in stock picking have still been able to outperform the standard Australian equity benchmark.
Analysing the Australian equity benchmark
An industry in very good health - whenever we have undertaken search exercises on domestic Australian Equity Managers, or monitored an Australian client’s Domestic Managers, we regularly found that the vast majority have outperformed. Needless to say this has made us curious to see if they really are as good as they appear, if there are lessons we could learn about how asset owners select managers in Australia, and finally whether this really is the Holy Grail and the vindication of investment boutiques’ approach that the rest of the world is seeking.
Do superior track records equate to investment skill?
The superior outperformance of Australian equity managers has led to a belief that their investment skill is better compared to their global peers. Seeking to understand investment behaviour, we ask whether this is really the case using Inalytics Peer Group database of institutional investor decisions. We examine whether superior track records equate to investment skill to understand what makes a skilful portfolio manager.
Separating luck from skill amongst outperforming managers
Using the Inalytics Peer Group database, in this study we analysed 62 Australian equity portfolios to determine whether:
1. Outperformance and success come down to investment skill or luck
2. What lessons can be learnt from identifying investment skill to help improve due diligence in the selection process by asset owners
Access the full research paper here to learn more about why track records are not always a reliable indicator of 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.
Research Paper 03: Track Records - Luck or Judgement?
Does investment skill exist and, if so, how valuable are track records in measuring it? These are perennial questions in the investment industry, where in reality, a track record of outperformance can be the result of sustained investment skill, or the result of blind luck.
Track records are poor guides for the future
Research papers and industry insights have consistently shown that track records are poor guides to the future performance of investment strategies. They offer little insight into the analysis of fund managers investment behaviour and are therefore imperfect in helping asset owners perform effective portfolio manager analysis. We strongly believe that looking beyond track records and working to understand the investment behaviour that drive track records can offer far more insight.
Measuring Hit Rates & Win/Loss Ratios
Our research used the Inalytics Peer Group database, which in this study contained over 215 long only equity portfolios and comprised around US$152bn of investment data by value. We focused our research on investigating how two key concepts – the Hit Rate and Win/Loss Ratio – can help inform how a fund manager generates alpha, and whether their track record can be relied upon as a useful indicator of investment skill.
Access the full research paper here to learn more about why track records are poor indicators of investment skill.
You can also view Research Paper 10: Track records luck or skill? to learn more.
Contact us for further information on how Inalytics can help to improve your investment process and select skilful investment managers.
Research Paper 02: Are Fund Managers Poor Sellers?
Running winning positions and cutting losing positions
One of the key characteristics in successful fund management is the ability to understand and play by the rules of probability, by running winning positions and cutting losing positions.
This sounds simple, though psychological and behavioural hurdles faced by investors have made this more challenging to do in practice than it is in theory. Behavioural finance has observed phenomena such as the disposition effect, prospect theory and mental accounting present hurdles to investor decision making. In this case, poor selling decisions.
What behavioural biases might apply?
We observed that the majority of research into these behavioural phenomena have been done on individual Investor portfolios to date. In our research paper we expand on the existing research by focussing on behavioural analytics of institutional investor portfolios and transactions to test whether professional portfolio managers are susceptible to the same behavioural biases.
What evidence have Inalytics used?
Inalytics Peer Group database of institutional investor decisions was used for the study. The selection focussed on Inalytics’ asset owner portfolios, which in this study included over 45,000 transactions across a broad range of industries, regions and benchmarks.
In our research paper, we examined our database of transaction level data to explore why portfolio managers don’t run their winning positions and cut their losing positions.
Access the full research paper here to learn more about how poor selling negatively impacts investment returns.
For guidance on overcoming poor performance, listen to episode 1 of our Analysing Investment Skill Podcast.
Research Paper 01: Identifying Investment Skill
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.
Access the full research paper here 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.