CHAPTER 9

ASSET ALLOCATION

Not to decide is to decide.

—Gary Helms

To set this chapter in perspective, we begin with a quote from the Introduction to Global Asset Allocation, one of the most technically rigorous and comprehensive texts on the subject of asset allocation:

[A]sset allocation remains more art than science and will probably remain so as long as the models used are only approximations of a reality that is in a constant flux.1

Obviously the authors believe in the importance of technical competence, or else why write the book? However, once again the wealth manager is cautioned to become a competent artist.

WHY BOTHER? DETERMINANTS OF PORTFOLIO PERFORMANCE (BHB)

In “Determinants of Portfolio Performance,” Brinson, Hood, and Beebower (BHB) (1995) set out to answer the question “What determines portfolio performance?” For their study, the authors used a database of large pension plans. The basic screen for a pension plan’s inclusion in the study included:

  • A corporate plan with the investment decisions resting solely with the corporation.
  • A large asset base.
  • Forty quarters of data available for 1974 to 1983.

The screen excluded public and multi-employer plans in order to eliminate plans that might be subject to legislative or legal constraints on the investment managers’ activities.

The final data set used for the study included 91 plans ranging in size from $700 million to $3 billion in assets. The plan assets were separated into three asset classes: cash, bonds, and ...

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