Inalytics, a manager evaluation firm, has released a whitepaper containing an analysis of where managers are strong or weak and where the gaps lie.
Inalytics, a manager evaluation firm, has released a whitepaper containing an analysis of where managers are strong or weak and where the gaps lie.
GLG Partners, the US-listed asset manager, co-authored the whitepaper. In order to show tangible working examples, GLG granted access to two of its portfolios to illustrate how the firm uses Inalytics’ research to provide objective feedback to its managers and traders.
Two GLG portfolios were analysed as part of the process – one European mandate and one Global mandate. Inalytics compiled data on every stock on these two portfolios and their benchmarks (MSCI Europe and MSCI World respectively) on a monthly basis to examine the consistency of GLG’s decision-making over time. Analysis ran from July 2001 to March 2009 for the European portfolio and January 2004 to March 2009 for the Global portfolio.
Inalytics’ trade timing statistics of the two portfolios showed that the managers’ decisions to initiate investments had higher quality than those when scaling up existing investments. This highlighted that they should have the 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 data from these two GLG portfolios also revealed that a strong Win-Loss Ratio (when good decisions offset poor ones), is more significant than a consistent Hit Rate (getting more decisions right than wrong).
Simon Savage, portfolio manager at GLG, says: "Being a performance gathering business, where revenues are driven as much by performance fees as management fees, we are passionate about delivering sustainably strong returns for our clients across all our products. At GLG we are fortunate to employ a raft of talented managers but we refuse to rest on our laurels – continual evaluation and fine tuning are essential to achieve our goals through an ever changing investment environment.
"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. To this end we place great importance on in-house and external performance appraisal tools.
"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, adds: "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.
"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."
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