The Equal Importance of Asset Allocation and Active                     Management

Xiong, James X.; Ibbotson, Roger G.; Idzorek, Thomas M.; Chen, Peng

doi:10.2469/faj.v66.n2.7

Cited by 68 publications

(89 citation statements)

References 8 publications

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“…When restricting the attribution model to public (U.S. and international) stock and (U.S.) bond benchmarks, the average endowment earns an alpha close to zero, the public stock and bond benchmarks together explain 99% of the time-series variation in the return of the average endowment, and the attribution model yields sensible estimates of the typical stock and bond allocations (roughly 60% stocks and 40% bonds). These results are consistent with the view that market movements, rather than asset allocation, are the most important determinant of time-series variation in performance (Brinson, Hood, and Beebower 1986;Ibbotson 2010;Xiong, Ibbotson, Idzorek, and Chen 2010).…”

Section: Resultssupporting

confidence: 81%

Do (Some) University Endowments Earn Alpha?

Barber

Wang

2013

Financial Analysts Journal

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The authors analyzed the returns earned by U.S. educational endowments using style attribution models. For the average endowment, models with only public stock and bond benchmarks explain virtually all the timeseries variation in returns, yield no alpha, and generate sensible factor loadings. Elite institutions perform better than public stock and bond benchmarks because of large allocations to alternative investments. The authors found no evidence that manager selection, market timing, and tactical asset allocation generate alpha. E ducational institutions hold billions of dollars in endowment funds. As of June 2011, the top five educational endowments (Harvard University, Yale University, Stanford University, Princeton University, and the University of Texas) managed a total of $102 billion and all educational endowments in the United States and Canada collectively managed in excess of $408 billion. 1 These funds are often critical to the finances of educational institutions, but we know very little about the performance of endowments. Our lack of knowledge regarding their performance, largely a result of the limited availability of data, is remarkable given the legendary performance of some institutions, most notably the Yale endowment. David Swensen, the long-time manager of the Yale endowment, has long advocated the so-called endowment model 2 of investing popularized in his book Pioneering Portfolio Management (2009). Following the principles that he espouses, the Yale endowment earned double-digit returns for over a decade, through 2008, before dropping by 24.5% for the year ending June 2009, which placed Yale in the bottom decile of endowment performance.Yale is not the only elite institution that was hit hard by the market woes of 2009. Harvard and Stanford also saw the value of their endowments drop by more than 20%. Many universities, including such elite institutions as Princeton and Harvard, that rely heavily on endowment funding for ongoing operational expenses were forced to slash spending in the wake of steep losses. 3 The losses incurred by endowments in 2009 caused plan sponsors to question their ability to deliver superior returns using the endowment model.In this article, we shed light on the strong returns (and sharp correction) experienced by many endowments. We analyzed endowment returns for a large set of institutions over the 21 years ending in June 2011 and addressed three questions: (1) Does the average endowment earn an abnormal return (alpha) relative to standard benchmarks? (2) Do elite institutions earn alpha? (3) Is there evidence of performance persistence in endowment returns?To answer these questions, we used simple assetclass attribution models pioneered by Sharpe (1992). The intercepts from these models can be interpreted as the additional return earned by endowment funds relative to the best-fit replicating portfolio. We began the analysis with simple two-and three-factor attribution models. The two-factor model uses benchmarks for publicly traded U.S. stocks (S&P 500 Index...

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Section: Resultssupporting

confidence: 81%

Do (Some) University Endowments Earn Alpha?

Barber

Wang

2013

Financial Analysts Journal

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“…For the SR equity funds invested in the United States, we considered two alternative measures: (1) the return of the MSCI USA Index 8 and (2) the equally weighted average return of all the SR US equity funds in our sample (Xiong et al 2010). For the SR funds invested globally, we also used two alternative measures: (1) the market-capitalization-weighted average return of our five conventional, geographic stock market indexes and (2) the equally weighted average return of all the SR international equity funds in our sample.…”

Section: Methodsmentioning

confidence: 99%

“…For global funds-and in line with Xiong et al (2010), who also studied international mutual funds-we used 10 regional conventional and SR benchmarks that corresponded to five potential geographic exposures of the funds: North America, the eurozone, the United Kingdom, Japan, and the world ex US. The five conventional benchmarks are FTSE North America, STOXX Euro 600, FTSE All-Share, FTSE Japan, and FTSE All-World ex-US.…”

Section: Datamentioning

confidence: 99%

“…Following the seminal work of Brinson, Hood, and Beebower (1986) and in line with Xiong, Ibbotson, Idzorek, and Chen (2010) and Aglietta, Brière, Rigot, and Signori (2012), we decomposed the total return of SR mutual funds into three components: the market return, the asset allocation policy return in excess of the market return, and the return from active portfolio management. The novelty of our approach is in adding a fourth component that measures the effect of SR screening on a fund's return variability, disentangling it from the effects of other sources of performance.…”

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confidence: 99%

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Do Social Responsibility Screens Matter When Assessing Mutual Fund Performance?

BrièreMarie

Peillex

Ureche-RangauLoredana

2017

Financial Analysts Journal

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Socially responsible (SR) mutual funds have grown rapidly worldwide in just over a decade. SR mutual funds have become a major market for the asset management industry, representing more than US$8 trillion in assets under management in the United States in 2016 (Social Investment Forum 2016). In this article, we address some important research issues that are not yet fully understood. What does SR screening contribute to SR mutual fund performance? How big are these contributions compared with those of traditional sources of performance-that is, market movements, asset allocation choices, and active management?In this article, we propose a new methodology that decomposes mutual fund performance to isolate the contribution of SR screening, allowing it to be compared with alternative sources of performance. Following the seminal work of Brinson, Hood, and Beebower (1986) and in line with Xiong, Ibbotson, Idzorek, and Chen (2010) and Aglietta, Brière, Rigot, and Signori (2012), we decomposed the total return of SR mutual funds into three components: the market return, the asset allocation policy return in excess of the market return, and the return from active portfolio management. The novelty of our approach is in adding a fourth component that measures the effect of SR screening on a fund's return variability, disentangling it from the effects of other sources of performance.The approach that we used in our study contrasts with previous studies on SR fund performance, which compared the average performance of a sample of SR funds with either a matched sample of conventional peers or a benchmark index (see, e.g., Hamilton, Joe, and Statman 1993;Statman 2000;Bauer, Koedijk, and Otten 2005;Kreander, Gray, Power, and Sinclair 2005;Gil-Bazo, Ruiz-Verdú, and Santos 2010;Renneboog, Ter Horst, and Zhang 2011). These studies concluded that the difference in average Regarding the contribution of socially responsible (SR) screening to mutual fund performance, we propose a new decomposition of the variability of SR mutual fund returns that isolates the contribution of SR screening, allowing it to be compared with other, traditional sources of performance. Our results, based on a sample of SR equity mutual funds, show that SR screening does contribute to the variability of mutual fund performance, together with asset allocation decisions and active management. This contribution is, on average, between 4% and 10%, roughly two times lower than the contribution made by active portfolio choices.

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“…In 2008, everyone went down together; in 2009, everyone went up together. Xiong, Ibbotson, Idzorek, and Chen (2010) analyzed the variation of returns and found that about 70 percent of return variation is explained by the general market and the remainder is equally split between (1) the specific asset allocation and long-term policy and (2) implementation, including security selection, fees, and timing. "…”

Section: Systemic Riskmentioning

confidence: 99%