ESSENTIA ANALYTICS STUDY FINDS LINK BETWEEN DECISION-MAKING AND INVESTMENT RETURNS
New research uncovers statistically significant connection between past decision-making skill and future relative portfolio returns
April 11, 2024 — London, New York — Essentia Analytics, the leading provider of behavioral data analytics for professional investors and allocators of capital, today published groundbreaking research establishing a statistically significant relationship between past decision-making quality and future investment returns.
The study, which examined the anonymized daily holdings data of 123 long-only equity portfolios from 2014-2023, finds that an active equity fund manager who has demonstrated decision-making skill over the last year is 1.5x more likely to outperform their benchmark over the next 12 months than a manager who hasn’t.
Decision-making skill is measured using Essentia’s peer-reviewed Behavioral Alpha® Benchmark methodology, which calculates a Behavioral Alpha Score for each portfolio based on the frequency and extent to which the manager’s decisions (sizing and timing, as well as picking decisions) have added or destroyed value compared with what would have been achieved by chance. Managers with scores above 50 have been demonstrating skilled decision-making and — as the research reveals — have 1.51 times greater odds of generating positive relative returns in the subsequent year (versus managers with scores below 50).
The study’s results are well illustrated by Essentia’s new Behavioral Alpha Benchmark app (pictured above). The free comparison tool distinguishes the skilled portfolio managers from the unskilled using a dashed line that represents chance (a Behavioral Alpha Score of exactly 50).
“It makes intuitive sense,” says Essentia Founder and CEO Clare Flynn Levy. “An investor who consistently makes good investment decisions should outperform one who doesn’t, and we now have sound evidence. These findings uncover a powerful new way to quantitatively compare and contrast equity managers and their relative probability of outperformance.”
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.