In the CFAI curriculums, they mentioned a research shown that asset allocation determines like 95% of the portfolio return. Can someone shed some light where that research coming from? I don’t have the books with me (not after the exam!!!)
Just found it, for those who’s interested, the figure is actually 93.6% published in financial journals. there’s another study done which is more complicated but an interesting read - “Does asset allocation policy explain 40, 90, or 100 percent of performance”
Got a link? I remember looking through CFAI footnotes and references, but turning up nothing… 95%, really? Not much room for active management.
vanguard says >100% in a study (i think around 102%). active management only screws things up and cost $ according the vanguard
I did a presentation on this to the guys at my work. Here is a quick cut and paste job from it. _____________________________________________________________________ Modern portfolio theory often quotes that investment returns are largely derived as a result of the asset allocation decision rather then the stock selection or market timing decision. This leads us to ask the following two questions: 1. How much of the variation in returns (across time) is explained by asset allocation? Studies (by Brinson, Hood and Beebower) have examined the effect of asset weights on investment performance, using data from a variety of funds from the early 70’s to the late 90’s. The study found 93.6% of a funds return over time can be explained by its target asset allocation. Unfortunately, this study is often misrepresented. The 93.6% result has also been commonly used to explain how much impact asset allocation has on the different returns between funds (i.e. across funds). Also, some investors quote that the over 90% result means that asset allocation will explain over 90% of any portfolio’s return – regardless of the make up of the portfolio. Individual investors portfolio’s typically aren’t as well diversified as big pension funds. The 93.6% result was based on a study that only sampled highly diversified pension funds. 2.How much of the variation of returns (across funds) is explained by differences in asset allocation? Studies (by Ibbotson & Kaplan) show about 40% of the variation of returns across funds is explained by asset allocation policy. For example, if one fund returns 5% more than another, then on average about 2% of the difference (i.e. 40% of 5%) is explained by a different asset allocation, while the remaining 3% difference (i.e. 60% of 5%) is explained by stock selection, timing and fee differences between the funds. Opponents to the Brinson, Hood and Beebower (BHB) study The BHB study demonstrated that the entire group of pension funds failed to add value through either market timing or stock selection. Therefore if you had purchased the entire group, you would have received (minus costs) roughly the returns of their asset allocations. Opponents to the study and the notion that “93.6% of returns over time can be explained by asset allocation” argue that the study only examined the long term total-return averages for a group of pension funds. The opponents claim that the BHB study only looked at large pension funds, most of which hired multiple sub-advisors and thus were conglomerates of money managers. They claim “the result shows more about the nature of money management in pension funds, rather than what asset allocation means to a single investor in practice”. BHP arrived at their result by computing the quarterly performance of the pension funds to an indexed version of that asset allocation, and then plotted that against the fund’s actual quarterly returns. The average R-squared statistic for the funds was 93.6. The opponents claim it is very difficult to draw firm conclusions from an R-squared statistic.
The mid 90s figure is from a study by Ibbotson while the high 80s figure - I believe - is the Brinson, Hood and Beebover paper, the seminal paper of asset allocation. What I take GREAT exception too is the idea that asset allocation is so important. If any client bothered to read the literature they would see that asset allocation EXPLAINS returns…it does not predict them or make them higher. What makes returns higher is great stock picking and THAT is what adds value in my view. Do you honestly think guys like Warren Buffet or Shelby Davis or Willy R sit around debating asset allocation research…they do not…they focus on studying stocks. I think thats the real point. Willy
No, im pretty sure the mid 90’s figure is by the BHB study done in 1986.
http://en.wikipedia.org/wiki/Asset_class somewhere down the bottom. 93.6% from BHB and 89.4 from Ibbotson. Nice wrap up Fremantle. That pretty much says all… both for and against. re Link: google the key word there, bcoz it’s a research article, I’m not sure if I should post the link. but pretty mcuh the first match…