In this study, individual stock selection and market timing accounted for less than 7% of a diversified portfolio’s return.
of returns and not on return levels or relative performance. Kaplan addressed these misconceptions in “Does Asset Allocation Policy Explain 40, 90 or 100 Percent of Performance?
A linear time-series regression yielded an average R-squared of 93.6%, leading BHB to conclude that asset allocation explained 93.6% of the in a portfolio’s quarterly returns. Singer published an update to the BHB study that examined returns from the 1977 to 1987 period and found a return variance of 91.5%, essentially confirming the results of the original study. As the investor’s circumstances or market opportunities change, so also should the investor’s asset allocation.” The hoax Jahnke referred to was the financial industry’s exploitation and misrepresentation of the BHB study.
In today’s parlance, the BHB study went viral and almost immediately was incorporated into the marketing pitches of investment advisors. In 1997 William Jahnke published a critique of the BHB study, in which he argued: “The fundamental problem with BHB’s analysis is its focus on explaining return volatility rather than portfolio returns. He saw its embrace of the BHB study as an abdication of their active management responsibilities.
As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments.This part of our website is for the attention of “Professional” investors.In the European Union, it is not for non-professional investors as defined in the MIFID or in each local regulation for the general public and nor for "US Person". There is no guarantee that any targeted performance or forecast will be achieved.” The authors looked at 10 years of monthly returns for 94 balanced mutual funds and 10 years of quarterly returns for 58 pension funds and confirmed the BHB results, finding that asset allocation did indeed explain about 90% of the period-to-period variability of a portfolio.The authors found, however, that the high R-squared was primarily explained by the funds’ exposure to the capital markets in general — “a case of a rising tide lifting all boats.” But Ibbotson and Kaplan also extended their research to consider asset allocation’s impact on the variation of returns among funds and the level of a typical fund’s return.Previously, he spent two decades in the asset management industry as a portfolio manager and analyst.He holds a BA in economics from Colgate University and an MBA in finance from Fordham University.In fact, investors should be more concerned with the range of likely outcomes over their investment planning horizon than the volatility of returns.” Jahnke went on to warn: “Fixed asset allocation solutions are inferior to analytically linking forward-looking strategic asset allocation solutions. But, as Hood later pointed out, “Nothing in the original paper suggests that active asset management is not an important activity.It was not the point of our paper, and our goal was not to demonstrate otherwise.” It’s clear that the BHB study has been both poorly understood and widely misrepresented. Ibbotson, in “The Importance of Asset Allocation,” noted an unpublished 1998 study by Jennifer A.Nuttall and John Nuttall that found 49 of 50 surveyed citations of the BHB study to be inaccurate!And in a related webcast presentation, Ibbotson shared examples from the Nuttall and Nuttall study, pulled from the marketing materials of two of the world’s most prominent mutual fund companies (emphasis added): One study suggests that more than 91.5% of a portfolio’s return is attributable to its mix of asset classes.