Brinson's
Asset Allocation: Valid Concept, Contrived Study, and Misquoted Conclusions
"Stupid is as stupid does," Forrest Gump | ||
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They came to the profound conclusion about asset allocation that, in part, is obvious to begin with:
Brinson
et al. describe the investment process used to manage a portfolio as a hierarchy
of three decisions taken one after the other:
The conclusion: "The contribution of investment policy is the overwhelmingly dominant contributor to total return, and dwarfs the contribution of investment strategy." Hmmmmm, let me see if I understand....... Invest in the right asset classes and the right investment sectors with the right mix and with the right amount of investment capital and investors will do better than if they invest in the wrong asset classes and the wrong investment sectors with the wrong mix and with the wrong amount of investment capital? What a concept! It was further concluded that the selection of individual investments and investment timing, an "investment strategy," had little to do with investment performance. Hmmmmm, let me see if I understand....... Whether you select the right investment at the wrong time, the wrong investment at the wrong time, the right investment at the right time, or the wrong investment at the right time, your decision will have little to do with determining investment performance? They received a Nobel Prize for this? Felony stupid! Gary Brinson and associates studied a group of pension fund managers and used their results to generalize about investing, investment performance, investors, and investment advisors. They limited the scope and the breadth of their study to a group of pension fund managers and, therefore, limited the possible conclusions down to one:
Worst of all, the conclusions of Brinson's Asset Allocation Study are being misused daily by the new and naïve minions of Brinson Asset Allocation believers who, by misquoting Brinson by omitting the words, "the variation in," in the phrase, "explaining on average 93.6% of the variation in total plan return...," have been able to further compromise the initial Brinson Study and its general conclusion to create a more specific and vastly more convenient, though completely untrue, Brinson's Asset Allocation conclusion such as, "explaining on average 93.6% of total plan returns" to conclude that asset allocation (of asset classes) alone determines 93.6% of investment returns.
Other poorly translated, and incorrect, conclusions of Brinson's Asset Allocation theory include the following:
Well, without getting into the arguments of the validity of Brinson's Asset Allocation theory, no, let's get into it. Because of the fiduciary capacity of pension fund managers to meet their investing responsibilities, this class of money managers did what most money managers under the same investing conditions would have done, they were more conservative and more on the investing defensive; don't need anybody going off on his or her own investing tangent trying to be a hero. They used their best investing judgment to rank the future performance possibilities of the three investment classes. They allocated capital accordingly. They diversified into many different investments within each of the broad asset classes. As there was very broad investment diversification within asset classes so as not to be too aggressive with very conservative capital, stock selection, the art, the expertise, the skill of picking the best, the most timely investments within broad asset classes, would have to be diminished in importance as the number of investments in each investment sector within each broad asset class were increased. The more the diversification to reduce investment risk, the closer to investing in all of the investments in an asset class, the closer to index investing, the less "stock picking and investment timing" there can be and the less important stock selection and market timing, therefore, will be. Since the investment styles essentially had to be/were the same, and the broad selection of investments within asset classes were similar, the only way to grade performance would be to see who did the best in picking the distribution of capital to the three asset classes. The conclusions of Brinson's Asset Allocation would have to be that 80% (why not 100%) of the variation in plan performance was explained by how much capital was invested in the asset classes and that investment performance has little to do with stock selection and investment timing because the structure of Brinson's Asset Allocation left out all of the other investment variables that do affect investment results! If a broader universe of investment managers, investors, and investment styles had been used, the conclusions would have been that there are many factors that explain both variations in total investment returns and actual investment performance. Granted, stock picking, investment timing pension fund managers used in the study may not have done well (a possible reflection of the skill levels of the fund managers or the difficulty of stock picking and investment timing) but that does not remotely translate into the conclusion that stock selection and investment timing have little impact on investment performance and into the suggestion that future investors need not place too much emphasis on investment selection and investment timing to improve investment performance. The theory of Brinson's Asset Allocation is further flawed:
Any statement that reaches a conclusion that investment selection and investment timing have little effect on investment performance is ludicrous. The theory of Brinson's Asset Allocation is absurd:
Though the allocation of capital is an important starting point for designing and constructing investment portfolios, Brinson's Asset Allocation is a mindless comfort zone for those who are satisfied with being average and who do not choose to accept either the challenge or the responsibility of knowing how to select investments or time investing. Enough of Brinson's Asset Allocation Theory Bashing! Rather than assign an excessive valuation percentage to any one contributor of investment performance, 100% of investment performance can be explained by the proper heed and use of all of the following portfolio management considerations listed below. The contributors to investment performance are listed in no particular order of importance, that is, until the final four; with grave reservation, they are most reluctantly included. They were included so as not to be guilty of doing what the fathers of the theory of Brinson's Asset Allocation did to manufacture their investment conclusions by arbitrarily omitting some of the known variables that are also "overwhelmingly dominant contributors to total investment returns."
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I would have been happier and supported Brinson's Asset Allocation Theory with a burst of unbridled enthusiasm had it concluded that Modern Portfolio Theory, Efficient Frontier, Beta & Alpha, Monte Carlo, and Past Performance are the overwhelmingly dominant non-contributors that do not impact total investment returns and, in fact, these concepts had no value in accounting for 91.5% of total returns. Visit: THE IMPORTANCE OF ASSET ALLOCATION by John Nuttall (for a more scholarly presentation) |