The Importance of Asset Allocation

5/1/2010

In his speech and in a two-part article he is co-authoring in the CFA Institute’s March/April 2010 Financial Analysts Journal (along with Morningstar/Ibbotson’s James Xiong, Tom Idzorek, and Peng Chen), Roger G. Ibbotson revisits the Brinson-Hood-Bebower contention that asset allocation accounts for 90% of a portfolio’s return, arguing instead that the sources of variation of returns from a portfolio are around 75% from the overall market, with the remainder about equally split from portfolio-specific asset allocation policies and from individual securities in the portfolio, along with the timing of trades, and fees.

World markets tumbled Wednesday amid acute fears that Greece's debt crisis would spread like wildfire through Europe after a leading credit ratings agency downgraded the country's debt to junk status and cut Portugal's rating as well. The downgrades by Standard & Poor's reinforced investor fears that Europe leaders were failing to get a handle on the government debt crisis afflicting Greece and that there is now a big chance of contagion with higher borrowing costs hitting other euro-using countries with weak finances.

The Securities and Exchange Commission this month charged Goldman Sachs with fraud over an investment tied to subprime mortgages, politicians have turned the firm into the arch-villain of the economic collapse. But the transaction at the heart of the S.E.C.’s complaint is a microcosm of the entire credit crisis. That is, there are no good guys here. It’s dishonest and ultimately dangerous to pretend that Goldman is the only bad actor. And the worst actor of all is the one leading the charge against Goldman: our government.

One of the reasons that we like to use relative strength as a return factor is its precision, its lack of assumptions, and its universality–basically its ability to rank even very disparate assets. Although value managers often discuss assets or stocks that are undervalued, there is little agreement on how value works.

Realtors, home buyers and sellers are rushing to complete sales agreements before the tax credit for home purchases expires this week. Though the Treasury Department and the real estate industry have termed the program a success, helping 1.8 million people buy homes, many tax policy experts say it has been singularly cost-ineffective: most of the $12.6 billion in credits through end of February was collected by people who would have bought homes anyway or who in some cases were not even eligible.

Stack of Stuff:

The Importance of Asset Allocation

World markets tumble as euro debt crisis escalates

Meet the Real Villain of the Financial Crisis

The Imprecision of Value

Home Tax Credit Called Successful, but Costly

Somali Pirates Say They Are Subsidiary of Goldman Sachs

S&P Downgrades Spain, outlook negative

Yield on Greek two-year notes increases

Debt Ratings Are Lowered for Portugal and Greece

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