Industry research by investment consultancy Inalytics has revealed a solid track record of results has little to do with identifying the skill of a particular Australian equity manager.
“What the paper is really saying is that there is a world of difference between track records and skill, and that skill is a thing which is permanent, and the track records come and go for a whole series of nefarious causes,” Inalytics chief executive Rick Di Mascio said.
“Basically track records over three years can be positive or negative depending on what’s happening in the market and good fund managers can underperform and bad managers can outperform,” he explained.
The study took a sample of more than 60 managers and assessed their performance against the S&P ASX 300 index as a benchmark from May 2006 to December last.
The research found on average domestic managers outperformed the benchmark by 760 basis points made up of 289 basis points from underweight positions and 471 basis points from overweight calls.
Further analysis was done to eliminate the effect of underweighting Real Estate Investment Trusts (REITs), a position all but two of the managers in the study held.
This position was found to contribute 261 basis points of the original 289 basis points gained from overall underweight plays.
Furthermore leaving out this element meant the lowered the average outperformance of the index to 355 basis points with underweight positions contributing -237 basis points and overweight calls contributing 592 basis points.
The results led Inalytics to question if there was any skill being shown beyond the decision to underweight REITs.
“What makes these results interesting is that many of these fund managers are charging performance fees for beating the index. Yet their results are not based on good stock selection, but by a decision to be underweight one industry sector,” Di Mascio said.
“People assess fund managers on their track record but they’re completely misleading. If you’re a superannuation fund you are effectively a buyer of skill, that’s what you’re paying your fund managers for, but you’re using a metric that is a track record which has little information in it about the thing you’re paying for.”
