Were Great Returns The Result of Skill or Luck?

Were Great Returns The Result of Skill or Luck?

Determining if a manager produced high returns thanks to their expertise or because of luck is a key piece of information for investors who are selecting which firm to give their money to, and Essentia Analytics purports to have found a way to figure that out, reports an article in Institutional Investor. The company assessed 76 portfolio managers on their expertise in generating strong returns, using a unique and first-of-its-kind test.

While performance track record is still a large part of the standard approach to choosing a manager, some of those historical returns can be chalked up to luck. Essentia’s gauge instead looks at the quality of the decisions that a manager is making. Those skills can be put to work again and again, as opposed to a lucky strike. In Essentia’s study, which was released in September, the firm evaluated 76 active, long-only equity portfolio managers over the course of 36 months through March 2022. Focusing on 7 key decision types—“stock picking, entry timing, sizing, scaling in, size adjusting, scaling out, and exit timing”—Essentia measured the impact that each manager’s decisions had on a portfolio to determine whether value was added or subtracted from it, the article details.

A surprise finding in the study is that managers make the wrong decision more often than not; a mere 18% of respondents made decisions that added value to the portfolio more than half the time. The “most-right” manager in the study only had an accuracy rate of 55%. Of course, many managers would maintain that their winners make up for the multitude of losers, and that’s backed up by the study: 68% of the respondents returned more value after a right decision than what they lost after a wrong one. The study also found that 58% of the stockpickers added value…but only 38% of them added value after deciding how big to make their position. And nearly three-quarters of the respondents lost value by selling off, indicating that managers pay more attention to entry than exit.

Though the study was anonymous, Essentia disclosed (with permission) to Institutional Investor the portfolio managers who ranked in the top 5. They were: Vishal Gupta of Morgan Stanley Investment Management’s Emerging Markets Leaders’ fund; Mark Denham of Carmignac’s Portfolio Grande Europe; Jonathan Good from Baird’s Small/Mid-Cap Growth fund; Xavier Hovasse and Haiyan Li-Labbé of Carmignac’s Emergents Fund, and Martin Walker from Invesco’s U.K. Opportunities Fund. 


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