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Based on the ground-breaking 1986 study by Brinson, Hood and Beebower, it has been a commonly held belief for over a decade that asset allocation explains more than 90 percent of portfolio performance. In 1997, however, William Jahnke challenged many of the BHB tenets. Arguments on both sides of the fence continue over the importance of asset allocation. To add to the discussion, the authors present this study in which they have used a large set of mutual fund data and a random process of mixing mutual funds to test whether asset allocation is still as important today as BHB found it to be more than ten years ago.
The notion of allocating assets within an investor's total portfolio has -been an especially hot topic over the past couple of years. Investors naturally responded to the collapse of the emerging markets by abruptly asking the proverbial question, "Why did I ever invest in that asset class in the first place?" Similar doubts have arisen about allocations to developed non-U.S. equities and small-cap U.S. equities.' It also has been common to hear investors question the prudence of continuing to maintain allocations to bonds.' Although such secondguessing seems to be a chronic reaction to market cycles, even the theoretical underpinnings of the importance of asset allocation have been challenged.'
For more than ten years, most investors and investment advisors have operated with the belief that asset allocation explains more than 90 percent of portfolio performance. The study that initially validated the importance of asset allocation is "Determinants of Portfolio Performance," by Gary Brinson, Randolph Hood and Gilbert Beebower (BHB), published in the July/August 1986 issue of the Financial Analyst Journal.' In contrast, William Jahnke challenges many of the BHB tenets in "The Asset Allocation Hoax," published in the February 1997 issue of the journal of Financial Planning.5 Has BHB's study been misinterpreted? Does jahnke present sound criticisms of BHB? Several efforts of "point and counterpoint" on the BHBversus-jahnke debate are already on the record, but there is plenty of room for additional research and arguments.'
Ibbotson and Kaplan conclude in their 1998 study that the resolution of the debate depends on how the questions are posed! Further, jahnke's paper was followed by additional research conducted by...