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Actions Speak Louder Than (Past) Performance: The Relationship Between Professional Investors’ Decision-Making Skill and Portfolio Returns
While it makes common sense, a statistically significant link between decision-making skill and investment returns has never actually been established — until now.
This paper identifies a statistically significant relationship between investment decision-making and investment returns (as measured by the Fama-French 3- and 5-factor models commonly used in portfolio performance attribution), and demonstrates that an active equity fund manager who has made skilled decisions over the last year is 1.5x more likely to outperform their benchmark over the next 12 months than a manager who hasn’t.
This research is highly relevant to anyone who is seeking alpha in public equities via funds.