RT Journal Article
SR Electronic
T1 The Three Critical Ingredients to Adding Value
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 37
OP 42
DO 10.3905/jwm.2003.320462
VO 5
IS 4
A1 Brett H. Wander
YR 2003
UL https://pm-research.com/content/5/4/37.abstract
AB 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.