How good is your investment manager?

This article proposes a new way of assessing an investment manager’s skill in the day-to-day management of portfolios. The authors argue that traditional investment performance measurement techniques, whilst appropriate for many purposes, do not provide the insights necessary to judge the skill of investment managers. To judge manager skill, it is necessary to consider the activity within the portfolio in terms of the purchases, sales and trades, and to determine the value added by that activity. The authors set out a framework by which this analysis can be carried out using the U.K. Operational Research OR Society’s investment portfolio as an example, and indicate how the results can be interpreted. In writing this article, the concept of risk in various guises was never far from the authors’ minds, and it is true to say that the meaning of risk in the context of assessing skill lies at the very heart of the argument.