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The Value of Asset Allocation Advice - Evidence of The Economist’s Quarterly Portfolio Poll

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  • J. ANNAERT

    ()

  • J.K. DE CEUSTER
  • W. VAN HYFTE

    ()

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    Abstract

    This study analyzes the economic importance of portfolio advice. Academic studies mainly focus on the performance of domestic equity portfolios of mutual or pension funds and attempt to measure abnormal performance following a return-based regression approach. Remarkably little is known empirically about the investment performance of international multiple-asset-class portfolios. We construct recommended portfolios based upon the asset allocation and security market advice of major international investment bankers and analyze the performance using weight-based performance techniques. We conclude that advisers are not able to outperform our benchmarks before transaction and other related costs. Weak performance on the asset allocation level is mainly driven by significant underperformance in the equity market. However, as there is significant and persistent differential performance in the short run, especially in the bond market, choosing the right investment adviser is of decisive importance in achieving abnormal performance. Our results indicate that portfolio advisers are not able to realize superior performance through appropriate timing and selection and as a consequence do not add value to a passive strategy of benchmark investing. Moreover, most of them exhibit strong momentum investing suggesting that they shift their recommended portfolio in favor of assets with high past returns and away from assets with low past returns.

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    File URL: http://www.feb.ugent.be/nl/Ondz/wp/Papers/wp_02_160.pdf
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    Bibliographic Info

    Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 02/160.

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    Length: 43 pages
    Date of creation: Dec 2002
    Date of revision:
    Handle: RePEc:rug:rugwps:02/160

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    Postal: Hoveniersberg 4, B-9000 Gent
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    Fax: ++ 32 (0) 9 264 35 92
    Web page: http://www.ugent.be/eb
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    Related research

    Keywords: Weight-Based Performance Evaluation; Multiple-Asset-Class Portfolios;

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    References

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    1. Blake, David & Lehmann, Bruce N & Timmermann, Allan, 1999. "Asset Allocation Dynamics and Pension Fund Performance," The Journal of Business, University of Chicago Press, vol. 72(4), pages 429-61, October.
    2. Elton, Edwin J. & Gruber, Martin J., 1991. "Differential information and timing ability," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 117-131, February.
    3. Bruce N. Lehmann & David M. Modest, 1985. "Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons," NBER Working Papers 1721, National Bureau of Economic Research, Inc.
    4. Goetzmann, W.N. & Ibbotson, R.G., 1990. "Do Winners Repeat? Patterns in Mutual Fund Behavior," Papers fb-_91-04, Columbia - Graduate School of Business.
    5. Elton, Edwin J, et al, 1993. "Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 1-22.
    6. Grinblatt, Mark & Titman, Sheridan, 1993. "Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns," The Journal of Business, University of Chicago Press, vol. 66(1), pages 47-68, January.
    7. Admati, Anat R & Ross, Stephen A, 1985. "Measuring Investment Performance in a Rational Expectations Equilibrium Model," The Journal of Business, University of Chicago Press, vol. 58(1), pages 1-26, January.
    8. Grinblatt, Mark & Titman, Sheridan, 1994. "A Study of Monthly Mutual Fund Returns and Performance Evaluation Techniques," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(03), pages 419-444, September.
    9. Jobson, J D & Korkie, Bob M, 1981. "Performance Hypothesis Testing with the Sharpe and Treynor Measures," Journal of Finance, American Finance Association, vol. 36(4), pages 889-908, September.
    10. Cornell, Bradford & Green, Kevin, 1991. " The Investment Performance of Low-Grade Bond Funds," Journal of Finance, American Finance Association, vol. 46(1), pages 29-48, March.
    11. Cornell, Bradford, 1979. "Asymmetric information and portfolio performance measurement," Journal of Financial Economics, Elsevier, vol. 7(4), pages 381-390, December.
    12. Dybvig, Philip H & Ross, Stephen A, 1985. " Differential Information and Performance Measurement Using a Security Market Line," Journal of Finance, American Finance Association, vol. 40(2), pages 383-99, June.
    13. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
    14. Lehmann, Bruce N & Modest, David M, 1987. " Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons," Journal of Finance, American Finance Association, vol. 42(2), pages 233-65, June.
    15. Mark Grinblatt & Sheridan Titman, . "Portfolio Performance Evaluation: Old Issues and New Insights," Rodney L. White Center for Financial Research Working Papers 22-88, Wharton School Rodney L. White Center for Financial Research.
    16. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1995. " Fundamental Economic Variables, Expected Returns, and Bond Fund Performance," Journal of Finance, American Finance Association, vol. 50(4), pages 1229-56, September.
    17. Cumby, Robert E & Glen, Jack D, 1990. " Evaluating the Performance of International Mutual Funds," Journal of Finance, American Finance Association, vol. 45(2), pages 497-521, June.
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