Skill Versus Luck

How to move beyond guessing about manager skill with decision-based analytics, not the outcome-based analytics used at present.

Skill is the raison d’être for active equity management. Yet precious little is known about manager skill. What is skill? Who has it? How should it be measured? Is a manager’s skill improving, declining, or remaining consistent? Without answers to such fundamental questions, capital allocators have no choice but to rely on inferences, hunches, and guesswork.

In Skill Versus Luck, Michael Ervolini explains how to move beyond skill fog with newer analytics developed over the past decade. Unlike conventional analytics that simply rehash fund outcomes, the newer cause-and-effect analytics relate a manager’s decisions to fund excess returns, providing rigorous measures of manager skill. Results from these newer analytics enable capital allocators to understand manager skill for the first time and make more effective allocation decisions.Table of Contents
Foreword
Chapter 1. The Search For Skill
Explains the reasons skill is relentlessly sought yet rarely identified.
Chapter 2. Sage Advice
Offers insights from industry leaders on the value of actively managed equities.
Chapter 3. Looking For Skill In All The Wrong Places
Describes the shortcomings of conventional analytics in quantifying skill.
Chapter 4. Information Advantage
Offers a method for assessing the alpha generation from a fund’s average new stock purchase.
Chapter 5. Skill Is Where The Action Is
Explains the importance of relating decisions to outcomes in order to measure skill.
Chapter 6. The Value Of Counterfactual Thinking
Presents an innovative method for using manager decisions to quantify skill.
Chapter 7. Understanding Skill
Describes computing the three basic skills using counterfactual portfolios.
Chapter 8. The Buy Process
Illustrates how a fund’s buy process can be analytically determined.
Chapter 9. To Sell Or Not To Sell
Explains how to determine if positions are being sold too quickly or too slowly.
Chapter 10. The Ins And Outs Of Adds And Trims
Describes how to quantify the impacts of interim trading on fund returns.
Chapter 11. Know When To Fold “Em
Offers a method to assess the management of substantial losers.
Chapter 12. Size Really Does Matter
Describes a method for assessing a fund’s effectiveness at building up new purchases.
Chapter 13. Triangulating In On Skill
Demonstrates how fund selection is enhanced with the use of the newer skill analytics.
Chapter 14. Conclusion
AcknowledgmentsENDORSEMENTS

“By exposing the limits of entrenched industry orthodoxy, Michael Ervolini reframes how we identify skill, offering allocators a disciplined path beyond outcomes toward better decision-making and stronger active management results.”
—Corrado Tiralongo, Chief Investment Officer, Canada Life Investment Management

“Ervolini reshapes how investors think about performance, offering practical tools to separate true skill from market noise. A powerful framework for leaders navigating uncertainty in global markets.”
—Stephen H. Dover, Chief Market Strategist, Head of Franklin Templeton Institute

“By clearly explaining both the old and the new ways of assessing manager skill, Michael has provided convincing evidence for why allocators must update their toolkits for selecting equity investment managers to meet the current moment.”
—Carrie Green, Director of Public Equity, Tennessee Department of TreasuryMichael A. Ervolini has over 45 years of executive experience in institutional asset management. He is the founder and previously the CEO of  two fintech companies: Cabot Investment Technology Inc. and Charter Research LLC. He is the author of Managing Equity Portfolios (MIT Press).