Our portfolio manager assessment identifies the top five investment decision-makers over the past 36 months, while powerful new insights emerge from our analysis.
Today we announce the results of our third-quarter 2024 Behavioral Alpha® Benchmark ranking, which recognizes active equity mutual fund 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.
The most recent 36-month assessment concluded on September 30, 2024 and measured the demonstrated decision-making skill of 89 active equity mutual fund portfolio managers, using the Behavioral Alpha Score.
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.
This quarter revealed some very interesting trends among the portfolios we analyzed. In addition to three new managers among our Top 5 scorers, we saw particular strength among small-cap managers relative to other strategies. All scores are calculated with reference to each fund’s prospectus benchmark, so this demonstrated decision-making skill was independent of the performance of small cap stocks in general.
The five managers with the highest aggregate scores across all decision types are recognized as top performers in the Q3 2024 Behavioral Alpha Benchmark ranking, and are as follows:
| Rank | Manager(s) | Portfolio (Benchmark) |
| 1 | Portfolio Construction Team | ARGA Emerging Markets Value Fund (MSCI Emerging Markets) |
| 2 | Paul Viera |
Harbor Capital Advisors/EARNEST Partners – Small Cap Value Fund (Russell 2000 Value) |
| 3 | David Schuster |
Brown Advisory – Small-Cap Fundamental Value Fund (Russell 2000 Value) |
| 4 | Jim Miles David Green |
Hotchkis & Wiley Small-Cap Value Fund (Russell 2000 Value) |
| 5 | Sukumar Rajah |
Franklin India Fund (MSCI India) |
Highlights of the Q3 2024 36-month assessment:
- This quarter’s list features three new funds in our Top 5, and is led by a new entrant, ARGA Emerging Markets Value Fund, which earned a quarterly Behavioral Alpha Score of 72.1, with the portfolio construction team notching a remarkable 54.7% decision hit rate and 236.5% decision payoff ratio.
- In general, we saw strength among managers of small cap portfolios: our 12 small cap portfolios had a median BA score of 54.7, while the 77 non-small cap portfolios in our database had a median BA score of 49.2. This is consistent with what we see in other attribution models (eg Fama-French), and could be amplified by the fact that small cap benchmarks are less concentrated than others.
- This quarter, for the first time, we compared mutual funds’ Behavioral Alpha Scores with those of our growing population (206) of active equity ETFs. We found that whereas 48% of mutual funds had BA Scores greater than 50 (meaning they added value through the decision-making skills we track), only 33% of active ETFs did. While this might be influenced by the reference benchmarks in use by active ETFs, it’s an interesting data point – and an area we intend to study further.
While further investigation into this trend is needed, Essentia Founder and CEO Clare Flynn Levy sees two potential explanations for this finding. “One could have to do with the benchmarks. ETFs’ prospectus benchmarks tend to be broad indexes – a value ETF might be benchmarked against the S&P500 index, for example, whereas a value mutual fund will be benchmarked against the Russell 2000 Value index – so if value stocks underperform the S&P, the ETF manager’s score will be reflecting the performance of value stocks in general, whereas the mutual fund’s score won’t.”
“But another very relevant potential explanation,” she says, “is a simple one: the average mutual fund manager uses more discretion in their decision-making around timing and/or sizing than the average active ETF does. Many active ETFs are quant strategies that rebalance in a very blunt way – once a month, for example, or even once a quarter. But they are still making decisions beyond just stock picking – and those decisions stand to add or destroy a lot of value.”
- These comparative findings are particularly relevant in light of our new research, which finds a statistically-significant relationship between Behavioral Alpha Scores and investment performance.
These results are publicly available through Essentia Insight’s Behavioral Alpha Benchmark app, which provides access to all mutual funds, active ETFs and SMAs in the Benchmark database. And, with our new Insight Pro tier, you can drill down on a portfolio’s Behavioral Alpha Score for deeper visibility into which decision types have been adding and destroying the most value.
How the BA Score is Calculated
The Behavioral Alpha Score uses daily holdings data to evaluate 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 on the portfolio’s performance vs its benchmark is measured and compared with what would have been achieved by chance, using decision attribution analysis techniques developed in conjunction with hundreds of portfolio managers over the past ten years.
Managers are assigned a Behavioral Alpha Score based on the hit rate (percentage of decisions that have 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, when compared with what would have been achieved by chance. Note that these calculations are all done relative to the portfolio’s stated benchmark.
Portfolios with Behavioral Alpha Scores > 50 (which appear to the right of the dotted line) have managers who have been adding value through their overall decision-making over the last three years. Those with scores < 50 (to the left of the line) have been destroying value.
Aggregate trends from our prior rankings (all based on 36-month timeframes):
| Percent of portfolios adding value |
Percent of portfolios with a hit rate over 50% |
Percent of portfolios with a payoff over 100% |
|
| Ending 2024-Q3 | 48.3% | 22.5% | 57.3% |
| Ending 2024-Q2 | 55.7% | 21.6% | 63.6% |
| 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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