Can fund managers asset allocate?
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Can fund managers asset allocate? Andrew Clare, Dirk Nitzsche & Meadhbh Sherman Centre for Asset Management Research, Cass Business School, London. Overview. What we are assessing are TAA skills Previous, related work

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Can fund managers asset allocate?

Andrew Clare,

Dirk Nitzsche

&

Meadhbh Sherman

Centre for Asset Management Research,

Cass Business School, London.


Overview
Overview

  • What we are assessing are TAA skills

  • Previous, related work

  • Data & methodologies

  • Sub-set of results

  • Summary

  • All the results are preliminary; final version of paper should be available in September; also in process of updating the results


Some previous work in this area
Some previous work in this area

  • Sharpe (1988, 1992) asserted that:

    • a fund’s asset allocation decisions account for almost all of its fund’s performance

  • Brinson, Hood and Beebower (1986) examine the performance of 91 US pension funds using data from 1974 to 1983 they found that:

    • the policy mix explained 93.6 percent of the average fund’s return variation over time (as measured by the R2)

  • Brinson, Singer and Beebower (1991) quarterly returns data on 82 US pension funds spanning the period 1977 to 1987

    • active investment decisions did little to improve portfolio performance because any abnormal performance was insignificant


Some previous work in this area1
Some previous work in this area

  • Using UK pension fund data, Blake, Lehmann & Timmerman (1999)

    • the majority of return is derived from the strategic asset allocation decision

  • Using data on large Canadian and US pension funds Andonov et al (2011) find:

    • that changes in asset allocation, market timing and security selection generate positive abnormal returns of 17, 27 and 45 basis points per year respectively

  • Using a small sample of US managers Weigel (1991) finds that

    • the vast majority (over 75%) of managers exhibit positive, significant market timing ability

    • managers that are good at market timing are paying for this skill in the form of negative returns to non-market-timing strategies


Data

  • We collected monthly, net of fee returns data on multi-asset class retail funds managed in Canada, the UK and the USA

    • Data sample is January 2000 to December 2010 – 714 funds

  • We also collected data on monthly proportions of multi asset class funds invested in: Cash, Govt bonds, Corporate bonds & Equities

    • Data sample is January 2006 to December 2010 – 355 funds

  • We use the two data sets as the basis for two approaches to the problem



  • Methodology
    Methodology

    • We apply variants of two methodologies to determine whether fund managers can ‘time’ their asset allocation decisions

    • We effectively test for tactical rather than strategic timing abilities

    • Methodology 1:

    • This is based on the “conditional beta” approach which imputes timing ability using fund returns (Ferson and Schadt (1996)):

    • We use several variants of this approach on the longer data set


    Methodology 1
    Methodology 1

    • If θ2 is positive it implies successful timing of equity market

    • If θ3 is positive it implies successful timing of corp bond market

    • If θ4 is positive it implies successful timing of govt bond market

    • If θ5 is positive it implies successful timing of cash


    Results us and uk
    Results – US and UK

    Timing coefficients

    • Corporate bond timing more prevalent than equity market timing

    • UK Cautious Managed, can’t seem to time cash!


    Results canada
    Results – Canada

    Timing coefficients

    • Bond timing more prevalent than equity market timing for Canadian funds

    • However, overall proportion that are found to have significant timing ability in all three markets is very low.


    Results summary
    Results – summary

    • Arguably Canadian managers are the better tactical asset allocators


    Methodology 2
    Methodology 2

    %ACj,t = α + βjRj,t+1) + εj,t

    • This approach is much simpler and much more direct, than the returns-based approach

    • It asks whether weightings rise/fall in proportion to market returns

    • A positive value for β indicates that it does

    • Again, we use a number of variants of this approach






    Dgf the new balanced
    DGF … the new balanced

    • Most of the research says that strategic asset allocation gives the biggest bang for one’s buck

    • In this work we are really looking at TAA

    • There have been a huge number of DGFs launched recently; there is SAA embedded in these funds

    • Some DGFs emphasise the TAA overlay as an added source of return


    Summary
    Summary

    • These are just a small set of the preliminary results

    • But the basic finding is that:

      • Using returns-based data there is little evidence of TAA ability amongst these managers

      • Using asset class weights, there is much more evidence of TAA ability

    • However, in both cases it is still very difficult to distinguish this skill from luck

    • But as we know, sometimes it’s better to be lucky than good!


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