Improving the Odds on Discovering Skilled Equity Managers

In the next section of our Chasing Alpha series, we are honing in on selecting skilled equity managers, specifically long-only, active managers. Manager skill can essentially be defined as the fund’s alpha, or benchmark-adjusted expected return. Identifying equity managers that can consistently generate alpha is a Herculean task. Why is this? Once an equity portfolio manager starts generating alpha, that manager or strategy will surely get noticed in this world of informational transparency and gossip. Second, as managers hoard more assets to oversee, the opportunity set for specific strategies gets more challenging. This is why sovereign funds like the Abu Dhabi Investment Authority (ADIA) employ both external fund managers and utilize internal staff on equity portfolios. External fund managers can implicitly or explicitly lend investment theme ideas to their clients. Third, with rapid advances in technology, proliferation of education and intelligence, the competitive advantages of equity portfolio managers can begin to erode as stock selection transforms more into an art versus science for active managers. Access to company management has never been easier in the past decade. Earnings calls and transcripts are recorded through technology providers. This has also led to an increase in concentrated equity strategies among asset owners like Canada Pension Plan Investment Board (CPPIB). But with a little analysis and adopting a multi-pronged approach, institutional investors can increase their luck on finding them.

High-quality investment conferences also permit asset owners to connect with peers, possibly to share success stories.

Baby Steps

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