Financial Analysts Journal 01 Jan 2000 Volume 56 Issue 1
Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?
Abstract
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 of returns among funds is explained by policy, and on average about 100 percent of the return level is explained by the policy return level.
About the Author(s)
Roger G. Ibbotson is Professor in the Practice Emeritus of Finance at Yale School of Management and chairman of Zebra Capital Management, LLC, a global equity investment and hedge fund manager. He is founder and former chairman of Ibbotson Associates. Professor Ibbotson conducts research on a broad range of financial topics, including popularity, liquidity, investment returns, mutual funds, international markets, portfolio management, and valuation. He has written numerous books and articles, including Stocks, Bonds, Bills, and Inflation (coauthored by Rex Sinquefield), which is updated annually and serves as a standard reference for information and capital market returns. Professor Ibbotson’s other books include The Equity Risk Premium, Lifetime Financial Advice, and, most recently, Popularity: A Bridge between Classical and Behavioral Finance. He is a regular contributor to and an editorial board member of both trade and academic journals. Professor Ibbotson serves on numerous boards and frequently speaks at universities, conferences, and other forums. He received his bachelor’s degree in mathematics from Purdue University, his MBA from Indiana University, and his PhD from the University of Chicago, where he also taught for more than 10 years and served as executive director of the Center for Research in Security Prices.