Fund managers who held overweight positions in stocks, such as Coles and Qantas, that were targets of leveraged buy-outs by private equity consortiums may deliver higher returns to their investors.

But their outperformance, of as much as 1 per cent compared with those who held a zero weighting in the stock, was not necessarily due to their greater management skill or strategy, a recent paper by Russell Investment Group said.

Takeovers and takeover speculation impact portfolios like random shots, introducing performance volatility that makes skill even harder to distinguish from luck, the report author, Russell Director of Alternative Assets and Strategies, Dr Andrew Goddard said. "Takeovers are low probability events that can cut across the grain of an otherwise sound investment process."

A fundamentally based equity fund manager who did not hold Coles in August 2006 on the view that the company would fail to deliver earnings as expected, (a view that turned out to be correct) may have been doing their job better than one that held an overweight position in the stock. The short-term outperformance of fund managers that did hold the stock was arguably more attributable to luck, than their ability to pick the takeover target.

In 2006, there was $27 billion of domestic LBOs completed or recommended by company boards. This figure dwarfs the annual average of $1.5 billion for the previous five years. However Mr Goddard points out that while buy-out activity is at historically high levels it still amounts to less than 2.5% of the Australian market capitalisation.