Stock picking is the dominant source of alpha in almost 90% of institutional portfolios, new analysis from Inalytics, a specialist in identifying investment skill, has found.
Based on analysis of more than 750 equity mandates managed on behalf of pension schemes and institutional investors globally, Inalytics found that 88% of portfolios generated positive alpha from research – the process of investigating stock opportunities and adding winning positions.
With the analysis also showing that research is the overwhelming source of excess returns, the study suggests that asset owners conducting due diligence on fund managers should subject their research capabilities to much closer scrutiny.
Inalytics found that managers with demonstrable research skills generated 383 basis points alpha per annum, dwarfing all other sources of alpha. In contrast, the analysis found that other key elements of investment processes, like portfolio construction and trading, generated little or no positive alpha.
For instance, position sizing – how much of a stock to own – caused the majority of portfolios to lose value. Of the 752 portfolios analysed, the process of sizing positions generated a drag on performance of -11 basis points on average, meaning weighting decisions added marginally negative alpha.
