LET'S TALK SKILL

2026 is the year we change how skill is discussed.  A highly useful initial step is to define that set of attributes which compose skill. Surely skill is more than some mystical qualities which a manager either possesses or doesn’t. In order to be useful, a description of skill must reflect abilities that are generally recognizable and readily quantifiable. These abilities must be far less subjective and more analytically robust than what passes for skill metrics today. Here’s the challenge: The discussion of skill must evolve from “feeling it or not” to “having measured it or not.”

There does exist a description of skill that is working for a growing number of asset owners and allocators. It focuses on the qualities that the manager brings to fund management. It concerns elements over which the manager has full control and so can refine and improve over time. Most importantly, it leads to metrics that identify which of the manager’s decisions and actions are helping elevate fund results (positive skills) and which are undermining fund results (negative skills). The benefit being that information of this quality enables you to better distinguish skill from luck. Here it is:

Definition: Skill is the combined effects of expert judgment and investment process.

Let’s consider what this definition implies.

Judgment is, of course, critical to skillful fund management. How else might a fund manager arrive at a decision? Pretty much every decision associated with equity management has a probabilistic outcome. Said differently, uncertainty surrounds each investment choice. What psychology and neuroscience make clear is that after all the data analysis is complete, individuals then overcome uncertainty with the help of their judgment. When the analysis is strong and the judgment well considered the result can be what is commonly referred to as high conviction successfully applied. Alternatively, when either the analysis or judgment falls short the resulting decisions often reflect more bluster than well-reasoned conviction. Therefore, judgment is an essential element of skill and needs to be measured. 

It is pretty much a given that investment process is critical to successful equity management. What is less common is considering it a component of manager skill. One reason for this oversight is that little substance is ever discussed about investment process. Typically, the fund manager presents a slide or two which a) illustrate their process graphically or b) describe its equivalence in bullet form. This is frequently followed by one or more anecdotes. What is unclear is: Is this process actually being used? Is it used regularly? Does it reliably lead to more successful decisions than not? If the manager is responsible for constructing and implementing investment processes, then these processes represent elements of the manager’s skill. Otherwise, why bother with process? Therefore, skill measures must include analytically derived assessments of the investment process.  

The phrase combined effects underscores just how tightly judgment and process are intertwined within equity fund decision making. And while the goal is to identify and quantify skill components with as much distinction and granularity as possible the complete separation of judgment and process is not always achievable. Therefore, skill metrics should be computed as specifically as the data allows while it is through considering distinct metrics together that the greatest insights can be achieved.