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These Managers Have Real Skill — Not Just Luck

Essentia Analytics’ second ranking seeks to solve one of the industry’s central conundrums.

There are a few new faces in the industry’s first ranking of equity portfolio managers, which analyzes returns based on investment decisions — and separates out the role of luck.

Inigo Mijangos and Joseph Idaszak, managers of the Brookfield Global Renewables & Sustainable Infrastructure fund, are new to the top spot in the ranking, which debuted in September 2022.

Essentia Analytics created what it calls the Behavioral Alpha Award to tackle the perennial question of whether the investment returns of managers are the result of skill, which can be repeated, or luck. The award recognizes active equity managers who have demonstrated superior investment decision-making skills in the three-year period ending December 31, 2022. The ranking considers the value added — or destroyed — by individual investment decisions. By analyzing these decisions rather than using traditional performance-based metrics derived from historical returns, the firm aims to weed out managers that simply got lucky.

Clare Flynn Levy, a former portfolio manager, told Institutional Investor that the overall percentage of portfolio managers who were adding value through all the decisions that they made during the period had increased — from 43 percent to 47 percent. “It’s still not ideal, but it’s a step in the right direction,” she said. Essentia uses behavioral finance research to help active managers identify and fix behavior and skills that hurt their alpha, a term used loosely to mean risk-adjusted returns that can’t be explained by the market.

The research and analytics firm tested 90 portfolio managers on the specific skills needed to produce strong investment returns, including stock picking, entry timing, sizing, scaling in, size adjusting, scaling out, and exit timing. The firm analyzed managers in its own database, since individual decisions about investments by the universe of asset managers are not publicly available.

The Brookfield managers, who were also No. 1 in stock picking, are followed by Jonathan Good, who oversees Baird’s Small-Mid-Cap Growth fund in the No. 2 spot, and Cedar Street Asset Management’s Waldemar Mozes and Jonathan Brodsky, who co-manage and subadvise the Harbor International Small-Cap Fund. In the fourth and fifth spot, respectively, are Vishal Gupta, portfolio manager of Morgan Stanley Investment Management’s EM Leaders fund, and Xavier Hovasse and Hayan Li-Labbe, both of whom manage the Carmignac Emergents fund. Cedar Street is also new to the top 5.

The firm said that since its last ranking, which was based on data ending in the first quarter of 2022, managers are getting better at their decisions, according to the firm. This time, about 23 percent of the managers had a hit rate above 50 percent for all decisions — compared to 18 percent in the last ranking.

Flynn Levy expects the results of the assessment to be more persistent than other measures. But it’s still too early to have a definitive answer, and the ranking is still a work in progress. “I would expect skill to be more persistent than performance. You’re talking about 1,000 swings of the racket. It’s not just one period,” she said.

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