The average active long-only equity manager in all strategies picks the best performing stocks relative to their benchmarks about half the time, according to a report analyzing 215 equity portfolios with a combined $152 billion in assets.
The hit rate, or ability to identify winners and losers, averages 49.6%, according to the report by independent U.K. consultant Inalytics. Even relatively higher performers generally have hit rates of only 51%.
The typical manager, however, compensates for a mediocre hit rate by generating good gains from the winners, according to the report. The win/loss ratio defined as the alpha generated from good decisions compared to the alpha lost from wrong decisions averages 102%. This translates to an average alpha of 2 percentage points.
Active equity managers also obtain more alpha in their overweight decisions than their underweight choices. Managers made the correct decisions to overweight a stock relative to its appropriate index about 48.5% of the time. But the win/loss ratio was 113.9%, meaning alpha averaged 13.9 percentage points.
These measures of hit rates and win/loss ratios help establish how a manager generates alpha, according to the report. All experience shows that track records are poor guides to the future Track records keep the score, but say nothing about how well the game was played or if (managers) are likely to win next time. A more detailed approach that scrutinizes every decision in terms of buys, sells, and long and short bets could be a more appropriate indicator of future performance, according to the report.
The 215 equity portfolios analyzed included emerging markets, Europe, global, Japan, Pacific, U.K., North America and smaller country-specific strategies. Thao Hua