For fifth straight quarter, majority of portfolio managers add value compared to their benchmarks.
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Essentia’s Behavioral Alpha® Benchmark ranking recognizes active equity mutual fund portfolio managers who have demonstrated superior investment decision-making skills over a 36-month period. Using our proprietary, peer-reviewed Behavioral Alpha Benchmark methodology, the ranking considers the value added (or destroyed) by individual investment decisions, rather than traditional performance-based metrics derived from historical returns (and thus subject to the random effects of luck).
The Behavioral Alpha Award is conferred annually at each calendar year-end (see the 2023 award winners here); with interim rankings computed each quarter.
The most recent assessment concluded on March 31, 2024 and measured the demonstrated skill of 72 active equity mutual fund portfolio managers in seven key decision types: stock picking, entry timing, sizing, scaling in, size adjusting, scaling out and exit timing. Each decision type was isolated and its impact on the portfolio was measured using decision attribution analysis techniques we have developed in conjunction with hundreds of portfolio managers over the past ten years.
Managers were assigned a Behavioral Alpha Score based on the hit rate (percentage of decisions that added value) and payoff ratio (the ratio of value added by the average good decision to the value destroyed by the average bad decision) for each decision type.
The five highest-scoring managers, represented by the magenta dots, are those towards the upper-right on this frontier diagram — furthest away from 0,0.
The five managers with the highest aggregate scores across all decision types are recognized as top performers in the Q1 2024 Behavioral Alpha Benchmark ranking, and are as follows:
| Rank | Manager(s) | Portfolio (Benchmark) |
| 1 | Mark Sherlock Henry Biddle Alex Knox Michael Russell |
Federated Hermes – U.S. SMID Fund (Russell 2500) |
| 2 | Andrew Hall Emily Roberts |
Invesco – Global Equity Fund (UK) (MSCI ACWI) |
| 3 | David Schuster |
Brown Advisory – Small-Cap Fundamental Value Fund (Russell 2000 Value) |
| 4 | Paul Viera |
Harbor Capital Advisors/EARNEST Partners – Small Cap Value Fund (Russell 2000 Value) |
| 5 | Sergey Davalchenko Ivan Kim |
AllianceBernstein – Emerging Markets Growth (MSCI Emerging Markets Growth) |
Highlights of the Q1 2024 assessment:
- For the fifth straight quarter, a majority of participating managers achieved Behavioral Alpha Scores above 50 (i.e., they added value through their decision-making compared to their benchmarks). This score is more meaningful than ever — Essentia’s new research finds a statistically significant link between a score above 50 and a manager’s odds of outperforming over the next 12 months.
- The team at Federated Hermes ranked No. 1 for the second consecutive assessment. They had an overall decision hit rate of 46% and a decision payoff ratio of 254% — for a combined Behavioral Alpha Score of 67.6. In other words, while only 46% of their decisions added value, those that did added 2.54 times as much value, on average, as their bad decisions destroyed.
- Paul Viera at EARNEST Partners (subadvisor to the Harbor Small Cap Value Fund) and the team of Sergey Davalchenko and Ivan Kim at AllianceBernstein are appearing in the Top 5 for the first time. Their Behavioral Alpha Scores were 61.5 and 61.4, respectively.
- Over the three years ending 31 March 2024, nearly 60% of managers added value through stock picking decisions when compared with their benchmarks — the highest level observed in the last three assessments. Only 18% had a positive decision hit rate in this skill, but 89% had a positive payoff ratio. This illustrates the power of payoff: active managers may pick more losers than winners (particularly in a market where a small number of index members have been outperforming), but the skilled managers hold winners that add significantly more value than the losers destroy, due to good sizing and timing decisions.
- For the first time, these results are publicly available through Essentia Insight’s Behavioral Alpha Benchmark app. And while the quarterly ranking is currently limited to mutual funds, the app provides access to all 220 portfolios included in the Benchmark database (mutual funds, active ETFs, and separately managed accounts).
Aggregate trends from our prior rankings:
| Percent of portfolios adding value |
Percent of portfolios with a hit rate over 50% |
Percent of portfolios with a payoff over 100% |
|
| Ending 2024-Q1 | 56.9% | 25.0% | 65.3% |
| Ending 2023-Q4 | 52.5% | 30.8% | 62.5% |
| Ending 2023-Q3 | 53.3% | 24.4% | 67.8% |
| Ending 2023-Q2 | 56.5% | 28.2% | 71.8% |
| Ending 2023-Q1 | 63.6% | 28.4% | 79.5% |
| Ending 2022-Q4 | 46.7% | 23.3% | 63.3% |
| Ending 2022-Q1 | 43.4% | 18.4% | 68.4% |
About Essentia Analytics
Essentia Analytics is the leading provider of behavioral data analytics services to professional investors and allocators of capital. Led by a team of experts in investment management, technology and behavioral science, Essentia combines next-generation decision attribution analytics technology with human coaching to help both equity fund managers and allocators identify investment skill and bias — and capture performance that was previously being lost to decision-making deficiencies.
To participate in the Benchmark ranking/awards or use the methodology for manager assessment, click here to get started with the Behavioral Alpha Benchmark app.
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