Ibbotson says Brinson ‘not quite right’ on returns

Portfolio specific asset allocation policy and portfolio security selection, timing and fees contribute equally to the variation of portfolio returns according to new research by Professor Roger Ibbotson of Yale School of Management, progressing earlier work by Brinson et al which attributed more than 90 per cent to asset allocation.

The paper, “The equal importance of asset allocation and active management”, co-authored by James Xiong, Thomas Idzorek and Peng Chen, analysed equity, balanced and international US mutual fund data from May 1999 to April 2009. It will be published in the March/April issue of the Financial Analysts Journal.

It found that 70 per cent of the sources of variation of portfolio returns could be attributed to market movement from the universe asset allocation, or what Ibbotson calls “just being in the market”.

But significantly the paper attributes a roughly equal weighting to portfolio specific asset allocation policy (16 per cent) and portfolio security selection, timing and fees (14 per cent).

He says market movement causes most of the variation in returns, and portfolio asset allocation and security selection are about equally important in explaining the differences between portfolios.

The much-quoted 1986 study by Brinson, Hood, and Beebower, “Determinants of Portfolio Performance”, found that the mix of stocks, bonds, and cash determines the volatility of the portfolio, concluding that asset allocation explained 93.6 per cent of the variation in a portfolio’s quarterly returns.

Ibbotson says his article demonstrates “that’s not quite right”.