ESSENTIA’S BEHAVIORAL ALPHA® BENCHMARK ASSESSES PORTFOLIO MANAGERS BASED ON DECISION-MAKING SKILL, NOT PAST PERFORMANCE
Morgan Stanley Investment Management, Carmignac, Baird, Invesco among the top equity portfolios revealed in a new skills-based analysis
September 15, 2022 — London, New York — Essentia Analytics, the leading provider of behavioral data analytics and consulting for professional investors, today announced the Essentia Behavioral Alpha® Benchmark, a game-changing tool that allows portfolio managers to be assessed and compared based on their demonstrated investment skill, rather than their recent past performance.
The Behavioral Alpha Benchmark incorporates Essentia’s proprietary skill measures in seven key decision types: stock picking, entry timing, sizing, scaling in, size adjusting, scaling out, and exit timing. Each decision type is isolated and its impact measured in terms of value added or destroyed at the portfolio level.
This groundbreaking methodology looks beyond the traditional approach to manager evaluation based on past performance — which is highly subject to the random effects of luck — and focuses instead on the quality of a manager’s decision-making, a far more accurate assessment of his or her skill.
In a new research paper, Essentia published the results of a study using the Behavioral Alpha Benchmark to conduct a skills-based assessment of 76 anonymized active equity portfolio managers over 36 months of activity (through March 30, 2022). Among the findings:
- Most managers got their decisions wrong most of the time. Looking across all decision types, only 18% had a “hit rate” — that is, decisions that added value — above 50%, and the most-right manager got it right just 55% of the time.
- However, when managers got it right, they got it very right: most managers (68%) added more value when they got a decision right than they lost when they got it wrong.
- Most managers demonstrated strong skill in selecting good stocks for their portfolios: 58% added value through their stock picking decisions. In contrast, managers typically destroyed value through their decisions on sizing a position — only 38% added value in this area.
The five managers who added the most value due to their demonstrated skill in these seven key decision types have agreed to be identified (Essentia will never reveal the details of its clients to anyone without their express prior permission) and are named 2022 Behavioral Alpha® Award winners. They are:
Essentia’s proprietary analysis ranks portfolio managers based on demonstrated investment skill, not recent past performance. In this Behavioral Alpha Frontier diagram, the managers who added the most value in seven key skill areas are represented by the magenta dots.
- Vishal Gupta, Morgan Stanley Investment Management – Emerging Markets Leaders
- Mark Denham, Carmignac – Portfolio Grande Europe
- Jonathan Good, Baird – Small/Mid Cap Growth
- Xavier Hovasse and Haiyan Li-Labbé, Carmignac – Emergents
- Martin Walker, Invesco – UK Opportunities Fund (UK)
“Data helps improve both the art and the science of investing,” says top-ranked manager Vishal Gupta, who runs the Emerging Markets Leaders fund at Morgan Stanley Investment Management. “We use Essentia’s data-driven tools every day to continuously improve our investment decision-making, and it’s great to see our efforts quantified and recognized in this way.”
“The ability to prove the extent to which an active fund manager is skilled has been a sort of holy grail for investors,” added Clare Flynn Levy, Founder and CEO of Essentia Analytics. “The Essentia Behavioral Alpha Benchmark represents a sea-change in the industry – one that will “raise all boats” for investors and managers alike. Highly-skilled active fund managers can finally demonstrate their value over passive index funds, and managers who have not yet achieved a high skill level have clarity on what they can do to continuously improve.”
About Essentia Analytics
Essentia Analytics is the leading provider of behavioral data analytics and consulting for professional investors. Led by a team of experts in investment management, technology and behavioral science, Essentia combines next generation data analytics technology with human coaching to help active fund managers measurably improve investment decision-making. Providing daily analysis on over $250 billion in assets, Essentia has uncovered an average of 150 basis points of alpha per year for its clients that was previously being lost to behavioral biases and decision-making deficiencies.