Wednesday, May 5, 2010

Roger Ibbotson attacks asset allocation "folklore"

"The time has come for folklore to be replaced with reality" says Roger Ibbotson in "The Importance of Asset Allocation" in CFA Institute's Financial Analysts Journal (March/April).

Folklore means "the idea that asset allocation policy explains more than 90 percent of performance," which is a misinterpretation of the classic 1986 article, "Determinants of Portfolio Performance" by Gary Brinson, Randolph Hood, and Gilbert Beebower, says Ibbotson. 

"Asset allocation is very important, but nowhere near the 90 percent of the variation in return is caused by the specific asset allocation mix," writes Ibbotson. Rather, active management plays a role equal to that of asset allocation, as shown by "The Equal Importance of Asset Allocation and Active Management," an article co-authored by Ibbotson with James Xiong, Thomas Idzorek, and Peng Chen in the same issue of the Financial Analysts Journal.

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3 comments:

  1. The folklore has been used for years now, by firms which offer both indexed and managed funds. It helps dodge the question of how to identify, in advance, the fraction of active managers who can outperform their benchmark. Fidelity published a paper a few years ago suggesting that outperforming managers can be identified with a momentum model. Does Ibbotson offer a asimilar solution?

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  2. If Ibbotson has such a solution, I haven't seen it. I'll bet such a solution would sell well.

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  3. Roger Ibbotson will speak on The Importance of Asset Allocation on May 27

    In this live seminar, Roger G. Ibbotson will discuss the relative importance of long-term asset allocation versus active security selection. In his recent FAJ article, The Importance of Asset Allocation, Professor Ibbotson finds that most of the variation in returns for a typical fund comes from general market movement with the remaining variation coming about equally from asset allocation policy and active management.

    This is a live event to be recorded on Thursday, 27 May 2010.
    In this live seminar, Roger G. Ibbotson will discuss the relative importance of long-term asset allocation versus active security selection. In his recent FAJ article, The Importance of Asset Allocation, Professor Ibbotson finds that most of the variation in returns for a typical fund comes from general market movement with the remaining variation coming about equally from asset allocation policy and active management.

    This is a live event to be recorded on Thursday, 27 May 2010.

    ReplyDelete

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