%0 Journal Article %A Brett H. Wander %T The Three Critical Ingredients to Adding Value %B Forecasting Skill, Opportunity, and Flexibility %D 2003 %R 10.3905/jwm.2003.320462 %J The Journal of Wealth Management %P 37-42 %V 5 %N 4 %X The article starts with the observation that the relationship between a manager's level of skill and the actual value-added to a portfolio can be quite nebulous. Thus, while the ability to make good predictions should result in value-added returns, actual portfolio results are often only minimally correlated to the manager's skill level. In this article, we explain why this relationship can break down and provide a framework for quantifying the expected value-added of a constrained portfolio. The article focuses on the three distinct factors that contribute to investment performance-the manager's forecasting skill: his ability to predict excess returns; the manager's range of opportunities to apply his skill across securities and over time; and the flexibility provided to the manager to express his forecasting skill in a portfolio, which is constrained to some degree. %U https://jwm.pm-research.com/content/iijwealthmgmt/5/4/37.full.pdf