Instinct and ruthlessness are key manager skills, according to a new white paper by Inalytics and GLG Partners.
Highlights of the paper show that fund managers decisions to initiate investments had a higher quality than those scaling up existing investments. Managers should therefore have confidence to trust their instinctive initial investment decisions and fully invest at that point, rather than waiting for the confirmation of the market before achieving their desired exposure.
The paper also revealed that a strong Win-Loss Ratio (i.e. when good decisions offset poor ones) is more significant than a consistent Hit Rate (i.e. getting more decisions right than wrong). This is another way of expressing the old investment adage, run your winners and cut your losers.
Simon Savage, Portfolio Manager at GLG, commented: “We know every manager is unique, possessing their own distinct strengths and weaknesses, but ultimately we believe that fund management is a skill that can be honed, and so should be developed and nurtured over time. Self-awareness of one s abilities and the effects of subconscious behaviour on our decision making enable us to refine and improve our investing methods. Asset managers and investors alike have traditionally viewed track records as the primary indicator of skill. As Inalytics outlines, track records are actually a notoriously unreliable indicator and predictor of skill and the reality is that a period of good performance is just as likely to be followed by a poor one.
Rick Di Mascio, Chief Executive and founder of Inalytics, said: “By putting fund managers under the microscope and analysing every decision they make, we are able to obtain a clear and objective picture of their DNA. Our processes lay bare the facts: either the decisions the managers make add value on average or they do not end of story. He continued, “The best managers are naturally competitive, insatiably curious and constantly looking for ways to add value. Given that a lot of lost alpha stems from behavioural biases that forensic analysis can pinpoint, we believe that more and more managers will address these issues and examine ways to improve their processes and procedures in the effort to gain an edge.”