State Street think tank: Is skilful alpha a myth?

Less than half of investment professionals think alpha is driven mainly by skill, a State Street independent think tank has found.

The Center for Applied Research, funded by State Street, canvassed investment managers and individual investors to determine potential biases and misconceptions in asset management.

More than 60 per cent of asset managers’ capital spending is on alpha generation, but the think tank says there is a “growing scepticism” about how outperformance is achieved.

Just 42 per cent of investment professionals believed alpha was created predominantly through skill. Clients were more positive, with 53 per cent of individual investors seeing alpha as the product of skill.

Center for Applied Research global head Kelly McKenna says the models for investment management success “are broken” and that investment professionals should spend less effort on achieving alpha.

Instead, they should focus on ensuring investors reach their financial goals. The survey found just 12 per cent of investors are confident of doing so.

McKenna says: “Investment professionals pay significantly more attention to activities that they believe will contribute value to alpha.

“While some of these are helpful, many are of limited value. True success includes not only achieving alpha, it also requires helping investors achieve their long-term goals, sustainably, over time.”

The report also delves into psychological biases, finding most investment managers credit themselves with success and blame outside factors for disappointment.

Both they and their clients remain overly reliant on past performance when making decisions.

Over 18 months, the think tank surveyed 3,744 investors, investment providers and government officials across 19 countries for the The Folklore of Finance: How Beliefs and Behaviours Sabotage Success in the Asset Management Industry report.