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Amundi owns the copyright and all other intellectual property rights in the website.For asset managers, a new year generally means a fresh look at asset allocation, and recently released survey results from Reuters show that, on balance, investors are beginning 2012 with a more defensive posture.Nuttall and John Nuttall that found 49 of 50 surveyed citations of the BHB study to be inaccurate!
In their seminal paper, “Determinants of Portfolio Performance,” published in the , BHB asserted that asset allocation is the primary determinant of a portfolio’s return variability, with security selection and market timing (together, active management) playing minor roles.
BHB’s 1986 study examined the quarterly returns of 91 large U. pension funds over the 1974 to 1983 period, comparing the returns to those of a hypothetical fund holding the same average asset allocation in indexed investments.
Noting that BHB did not separate the market returns from the incremental impact of asset allocation policy, Ibbotson later summed up their findings as follows: About three-quarters of a typical fund’s variation in time-series returns comes from general market movement, with the remaining portion split roughly evenly between the specific asset allocation and active management. The original BHB paper sparked a wave of related research, most notably that of Ibbotson and his colleagues, that has advanced our understanding of asset allocation’s impact on investment performance.
The studies collectively demonstrate the importance of (1) being in the market, and (2) doing a strategic asset allocation.
Previously, he spent two decades in the asset management industry as a portfolio manager and analyst.
He holds a BA in economics from Colgate University and an MBA in finance from Fordham University.
In “The Equal Importance of Asset Allocation and Active Management” from 2010, Ibbotson and colleagues James X. Idzorek, CFA, and Peng Chen, CFA, studied 10 years of returns for more than 5,000 mutual funds in order to measure the relative importance of asset allocation policy versus active portfolio management.
Through the use of cross-sectional regressions, they decomposed a portfolio’s return into its three components — the market return, the asset allocation policy return in excess of the market return, and the return from active management.
As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments.