The sharper focus seems so much more manageable than the unbelievably complex task of attempting to master the multi-dimensional aspects of macro, micro, geopolitics, fiscal, monetary, cultural, historical, ethical, military and many other influences on asset allocation outcomes.
So the read-across to the multimanager is surely that it feels correct to lean into fund selection.
Second, even if you can gain an understanding of the asset allocation influences, they will change, often significantly. The biggest changes of the past 20 years have been globalisation and the emergence of many previously emerging markets.
Changing landscape
Taking the FTSE 100 Index as at the end of 2014, for example, only 26.8% of revenues came from the UK.
How does this get dealt with in asset allocation?
And the number of constituent countries you can allocate to in, say, the MSCI All Countries World Index has gone up from 34 in 1990 to 45 in 2010, at the same time the five largest countries as a percentage of the index have shrunk from 83% to 68%.
As an asset allocator you have to learn quickly about the impact and influence of many new economies and markets, which is tricky.
Third, play to your strengths. At least on paper a team such as ours has a significant potential competitive advantage over most fund buyers due to the resources in our numbers (eight in our case), our experience (more than 140 years combined), prime access to managers, software systems both bought in and in-house, collective bargaining power on charges and so on.
I am not sure we, or others, could claim a similar scale of competitive advantage in terms of asset allocation.
The counter arguments in favour of asset allocation often quote various surveys, often lazily.
The seminal study on asset allocation is perhaps the 1986 BHB survey, Determinants of portfolio performance, which found that 93.6% of a portfolio’s variation in its quarterly returns came from asset allocation. A 1998 study of citations of this survey found that 49 out of 50 were inaccurate.
Seeing sense
In my experience, people mostly try to claim 93.6% of outperformance can be explained by asset allocation, which is just plain wrong.
Ibbotson and Kaplan tried to take this further in 2000 and, looking at 10 years of monthly returns for just 94 balanced mutual funds and 58 pension funds, it found only 40% of return variation being down to asset allocation.
Again, they are widely misquoted. I hope that in this debate I have laid out some common sense reasons why fund selection wins out, but more than that I believe this is what our investors are asking for and buying into when they choose a product with the name ‘multi-manager’ on the tin.
And the good news is that if it is done well it can reduce risk and be more consistent, and in doing so reduce the impact of timing, helping investors tap into compound interest.
This means more investors enjoy solid returns, not just the lucky or bright few who bought at the bottom of a cycle.
