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

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Can fund managers asset allocate andrew clare dirk nitzsche meadhbh sherman

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


Can fund managers asset allocate andrew clare dirk nitzsche meadhbh sherman

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


  • The multi asset class funds

    The multi-asset class funds


    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


    Timing the equity market

    Timing the equity market


    Timing credit

    Timing credit


    Timing the govt bond market

    Timing the govt bond market


    Timing cash

    Timing cash


    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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