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Wrong calls on asset allocation

It seems from the article in the February 1 edition of Money Marketing that Mark Dampier’s under-standing of the work of Gary Brinson et al has not increased over the last few weeks since his original article which both misquoted and misinterpreted their 1986 and 1991 findings on the impact of asset allocation on the variability of portfolio returns.

Indeed, judging by his responses to Andrew Wilson’s comments, he still seems to believe that the authors had something to say about the impact of making geographical region calls when in fact their study, as I pointed out in my previous letter, deliberately excluded all international (that is, non-US) assets.

Calls on geographical sectors are not asset allocation calls as the return mechanism for one regional equity market is no different to that for another – they are therefore similar to making calls between value and growth, telecommunications and energy stocks or even BP and Shell.

As to whether anyone could have predicted that the 2000/2003 bear market would have gone on for three years, it is not clear why this should be the case. Given enough analysts, it is likely that at least one would have done so even by random chance although presu-mably most investors (professional and otherwise) did not do so or they would have been in cash for the whole time and we would all be buying said analyst’s book.

The fact is that there is a vast body of evidence which tells us that there is just no reliable and cost-effective way to profit from changes in market sentiment in the short term, whether they be to split between, for example, debt and equity, value and growth, small cap and large cap or Japan and Europe.

The only reliable way to ensure protection against such unpriced events is to maintain a widely diversified portfolio at all times and to rebalance it back to the allocation (that is, the split between debt and equity) which is appropriate to that investor’s objectives and/ or risk tolerance when it diverges significantly from it. If it is diversified properly, it is likely that at least one portfolio component will usually be falling in value. If it is not, then it is probably not adequately diversified.

Robert Lockie,
Investment manager and branch principal,
Bloomsbury Financial Planning

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