The Asset Allocation Debate

Ever since the publication in 1986 of the oft quoted Brinson, Hood, and Beebower (BHB) study on asset allocation, debate has swirled about the validity of the study's conclusions. A sampling of available studies on the BHB controversy are rendered below:

Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?

Roger G. Ibbotson and Paul D. Kaplan

Disagreement over the importance of asset allocation policy stems from asking different questions. We used balanced mutual fund and pension fund data to answer the three relevant questions. We found that about 90 percent of the variability in returns of a typical fund across time is explained by policy, about 40 percent of the variation among funds is explained by policy, and on average about 100 percent of the return level is explained by the policy return level.

The Contribution of Asset Allocation Policy to Portfolio Performance

This study examines the total return of investment portfolios composed of mutual funds and analyzes the contributions of strategic asset allocation (investment policy), tactical timing (the periodic over- or underweighting of asset classes relative to the strategic weightings), and security selection (the selection of individual mutual funds to represent asset classes). The results of Brinson, Hood and Beebower (1986) and Brinson, Singer and Beebower (1991) are confirmed using a sample free of several data limitations in their samples. Utilizing data from five model mutual fund portfolios, covering a wide range of asset class combinations over a three year period, I demonstrate that strategic asset allocation policy explains more than 90 per cent of the variation in total portfolio return, and that tactical timing decisions and security selection may also contribute significantly to the variation in total return. I expand the existing literature by performing a pooled regression, which incorporates all portfolios together (in addition to examining each portfolio individually and averaging the results, as in Brinson et al.) I further demonstrate that the results are also valid when examining risk-adjusted return: I extend the analysis to include several types of risk measure, examining the data in terms of absolute and relative variance, and conclude the analysis with an evaluation of the portfolios in terms of riskadjusted return, demonstrating that the results obtained vis-a-vis total return also apply on a risk adjusted return basis.

Wolfgang Drobetz and Friederike Köhler

Abstract

It is well known that asset allocation policy is the major determinant of fund performance. However, there is substantial disagreement about the exact magnitude of the contribution of asset allocation. Following the approach in Ibbotson and Kaplan (2000), we use German and Swiss balanced mutual fund data to show that the correct answer depends on the specific question being asked. We find that more than 80 percent of the variability in returns of a typical fund over time is explained by asset allocation policy, roughly 60 percent of the variation among funds is explained by policy, and more than 130 percent of the return level is explained, on average, by the policy return level.

The asset allocation debate: Provocative questions, enduring realities

Vanguard Institutional Research

Ever since the 1986 “Brinson study” stated that asset allocation accounts for more than 90% of the variation in portfolio returns over time, investment professionals have been debating its implications. The opposing view, introduced by William Jahnke in 1997, counters that asset allocation alone cannot account for the variation in returns across portfolios. This report analyzes industry research surrounding this ongoing debate (including recent Vanguard studies), with an in-depth review of static versus dynamic asset allocation strategies and index versus active portfolio construction.

Another Look at the Determinants of Portfolio Performance: Return Attribution for the Individual Investor: French, Craig W.

Abstract

This study examines the total return of investment portfolios composed of mutual funds and analyzes the contributions of strategic asset allocation (investment policy), tactical timing (the periodic over- or underweighting of asset classes relative to the strategic weightings), and security selection (the selection of individual mutual funds to represent asset classes). The results of Brinson, Hood and Beebower (1986) and Brinson, Singer and Beebower (1991) are confirmed using a sample free of several data limitations in their samples. Utilizing data from five model mutual fund portfolios, covering a wide range of asset class combinations over a three year period, I demonstrate that strategic asset allocation policy explains more than 90 per cent of the variation in total portfolio return, and that tactical timing decisions and security selection may also contribute significantly to the variation in total return. I expand the existing literature by performing a pooled regression, which incorporates all portfolios together (in addition to examining each portfolio individually and averaging the results, as in Brinson et al.) I further demonstrate that the results are also valid when examining risk-adjusted return: I extend the analysis to include several types of risk measure, examining the data in terms of absolute and relative variance, and conclude the analysis with an evaluation of the portfolios in terms of riskadjusted return, demonstrating that the results obtained vis-a-vis total return also apply on a risk adjusted return basis.

The Brinson 93.6% Hoohah, or, The Fable of the Blind CFAs and the Portfolio: William Bernstein


The 93.6% Question of Financial Advisors: Meir Statman