Investment Skill Comes From Analysis
Updated: Sep 9, 2022
Investment skill is shown in stock-picking and is primarily a research process, says an analysis from Inalytics. It says there is a long tail of elite managers who demonstrate investment skill through consistent alpha generation. Analyzing where this elite adds value, it’s clear that it is stock-picking. The upper quartile of managers generate significant alpha from their research and sizing adds very little value to the average portfolio and is uncorrelated with successful stock selection. This means when conducting due diligence on managers, asset owners need to fully understand how the research process adds value due to the significant role it plays in alpha generation. As well, managers need an objective, empirical analysis of their investment process. Without it they may underutilize their strengths and repeat their mistakes. Much like sport, investment management is a skills-based activity and no one would suggest that there is an elite in every sport, it says.