The Importance of Investment Policy

The contribution of asset allocation policy to portfolio performance

“…In other words, they conclude that total fund returns are largely unrelated to the level of active management. In two recent studies, SURZ, STEVENS, and WIMER (1999) and IBBOTSON and KAPLAN (2000) argue that this result has led to a number of misinterpretations among investment professionals. The BRINSON et al studies have been applied to questions that they never intended to answer.…”

“…Therefore, we believe that our results cannot simply be dismissed on the basis of a selection bias. Finally, SURZ, STEVENS, and WIMER (1999) argue that just because the average impact of investment policy should be near 100%, active management is not necessarily worthless. In the end, half the managers are better than average.…”

“…As strongly emphasized by IBBOTSON and KAPLAN, the BRINSON et al studies did not address this question. SURZ, STEVENS, and WIMER (1999) argue that neither a timeseries nor a cross-sectional R 2 is a correct measure because both relate to the variability of returns, rather than to the magnitude (i.e., the level) of returns. Accordingly, their focus is on measuring what percentage of the absolute level of a typical fund's return is attributable to asset allocation policy.…”

Risk Allocation versus Asset Allocation

“…10 Brinson, Singer, and Beebower [1991] originally addressed the issue, suggesting that over 90% of the total risk of active portfolios is driven by asset allocation (systematic risk). See also Surz, Stevens, and Wimer [1999] and Ibbotson and Kaplan [2000]. 11 Investors seem to be more willing to tolerate systematic risk than active risk.…”