Professional Investors Getting It Right?
Interesting Study cited in Pensions & Investments on line version.
Here is it's link. http://www.pionline.com/apps/pbcs.dll/article?AID=/20081126/DAILY/811269993/-1/RSS02&rssfeed=RSS02
I'll have more to say on this at a later date because it drives home one of my points about using ETFs as a substitute for both common stocks and mutual funds.
Hits come half the time for long-only managers
By Thao Hua
Posted: November 26, 2008, 12:09 PM ET
The average active long-only equity manager in all strategies picks the best performing stocks relative to their benchmarks about half the time, according to a report analyzing 215 equity portfolios with a combined $152 billion in assets.
The hit rate, or ability to identify winners and losers, averages 49.6%, according to the report by independent U.K. consultant Inalytics. Even relatively higher performers generally have hit rates of only 51%.
“The typical manager, however, compensates for a mediocre hit rate by generating good gains from the winners,” according to the report. The win/loss ratio — defined as the alpha generated from good decisions compared to the alpha lost from wrong decisions — averages 102%. This translates to an average alpha of two percentage points.
Active equity managers also obtain more alpha in their overweight decisions than their underweight choices. Managers made the correct decisions to overweight a stock relative to its appropriate index about 48.5% of the time. But the win/loss ratio was 113.9%, meaning alpha averaged 13.9 percentage points.
The average hit rate was 50.6% when managers underweight a stock relative to its benchmark, but the win/loss ratio was only 92.2%. This translates into an alpha loss of 7.8 percentage points, according to the report.
“These measures of hit rates and win/loss ratios help establish how a manager generates alpha,” according to the report. “All experience shows that track records are poor guides to the future. … Track records keep the score, but say nothing about how well the game was played or if (managers) are likely to win next time.”
Contact Thao Hua at thua@pionline.com
By Thao Hua
Posted: November 26, 2008, 12:09 PM ET
The average active long-only equity manager in all strategies picks the best performing stocks relative to their benchmarks about half the time, according to a report analyzing 215 equity portfolios with a combined $152 billion in assets.
The hit rate, or ability to identify winners and losers, averages 49.6%, according to the report by independent U.K. consultant Inalytics. Even relatively higher performers generally have hit rates of only 51%.
“The typical manager, however, compensates for a mediocre hit rate by generating good gains from the winners,” according to the report. The win/loss ratio — defined as the alpha generated from good decisions compared to the alpha lost from wrong decisions — averages 102%. This translates to an average alpha of two percentage points.
Active equity managers also obtain more alpha in their overweight decisions than their underweight choices. Managers made the correct decisions to overweight a stock relative to its appropriate index about 48.5% of the time. But the win/loss ratio was 113.9%, meaning alpha averaged 13.9 percentage points.
The average hit rate was 50.6% when managers underweight a stock relative to its benchmark, but the win/loss ratio was only 92.2%. This translates into an alpha loss of 7.8 percentage points, according to the report.
“These measures of hit rates and win/loss ratios help establish how a manager generates alpha,” according to the report. “All experience shows that track records are poor guides to the future. … Track records keep the score, but say nothing about how well the game was played or if (managers) are likely to win next time.”
Contact Thao Hua at thua@pionline.com
posted by CR English at 8:48 AM
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