As corporate pension plan sponsors try to figure out how to mend the damage inflicted on plan funding over the last year, some are surely wishing for a crystal ball to help them pick the investments that will dig them out of their funding hole. In the absence of augury, Inalytics suggests its Behavioral Performance Systems (BPS) can provide an assessment of portfolio managers' skills that is more forward-looking than historical performance data.
"There is a growing recognition among corporate pension plans and others that the existing tools to measure managers, evaluate managers and choose a manager do not always work at well as one might wish," says Lisa Manuele, head of Inalytics North America.
U.K.-based Inalytics examines three years of a fund manager's holdings and daily transactions to assess the manager's capabilities, a process that searches for "repeatable patterns of performance that indicate skill or whether they simply got lucky," she says.
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Inalytics considers two key factors: conviction and timing. "Conviction is how much or how heavily managers overweight their position versus their underlying benchmark," Manuele says. Inalytics' research suggests that "on average, 95% of portfolio managers only get securities selection right 50.5% of the time–basically they get one right for every one wrong," she notes. "What the differentiating factor is, when they get it right, do they get it very right?"
When it comes to timing, Manuele says Inalytics' numbers show portfolio managers often hang onto poorly performing holdings and sell winners in order to finance another trade. "So they end up losing money twice," she says. "The winners would make more if they didn't sell them and the losing stock selections continue to lose more."
Inalytics traditionally markets its product to plan sponsors. Manuele says the detailed information in its reports can help a pension plan's investment committee ask very specific questions when interviewing potential fund managers. (Inalytics also provides a portal that lets institutional investors get a view of their investment funds' holdings.)
But investment firms can also use the BPS reports as a proof that they can provide to clients and portfolio managers can use Inalytics' assessments as performance feedback, she says. "This is coaching for the investment management world."
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Susan Kelly
Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.
