GLOBAL - The concept of following a fund manager's track record as a measure of performance is meaningless, as fund managers typically get only half of their decisions right, research suggests.

Inalytics, the specialist equity manager evaluation firm, examined 215 long-only portfolios with a combined market value of $152bn (€117.4bn) over multiple time periods, analysing hit rates and win/loss ratios, and found even ‘good' managers only have hit rates of 51%.

The average hit rate, or the number of correct decisions as a percentage of the total number of decisions, stands at 49.6% - "no better than 50:50", said the firm.

On the other hand, the win/loss ratio, -a comparison of the alpha generated from good decisions to the alpha lost from poor decisions - showed the typical manager compensated for a mediocre hit rate by generating good gains from the winners, serving to offset the losses from poor decisions.

"This trend is reflected in an average win/loss ratio of 102% - meaning that the alpha derived from good decisions is 2% more than that lost from poorer ones," the company said.

Rick Di Mascio, chief executive at Inalytics, told IPE the research suggested using track record as a measure of manager skill is meaningless, since it does not tell you how the manager has attained the record.

He said: "The real point is that track records may come and go but a manager's tendencies are more persistent. In general, managers are good at buying and going overweight but poor at selling and going underweight."

Di Mascio also pointed out the industry's maxim suggested six correct decision out of 10 would constitute solid performance, however in Inalytics eyes this would actually constitute outstanding performance.

The report is part of a new initiative which sees the company also rolling out a monthly transparency report to help pension funds monitor the impact of manager decisions on the portfolio. (See earlier IPE story: Inalytics launches monthly manager report)

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