As we have stated elsewhere, we at Atlas Capital Advisors believe the asset allocation decision is the primary investment performance driver. However, we have noted numerous curious asset allocation ideas in the both the consultant and register investment advisor communities that don’t quite make good common sense. A case in point that we find particularly bewildering: the equal selection of both value and growth equity mandates as part of an asset allocation policy. The FACT of the matter is that anyone who has looked at this topic knows that over long periods of time, value tends to outperform growth systematically. Below is a synthesis of the data available on the Ken French web page at Dartmouth. If you took the entire US stock market from 1927 to 2009 and broke each stock into portfolio deciles based on Price to Book ratios, you would achieve the following returns over the time period.

 

Ken French / Dartmouth

What is interesting about this analysis is not that the ‘cheapest’ (portfolio with lowest Price to Book) did the best and that the most ‘expensive’ did the worst, but rather that the portfolios line up almost exactly as you would expect them to (other than portfolios 5-8).

So why do most investment managers select both value and growth in their investment strategy? No clue. In fact, if you select value and growth together in a single portfolio, you are basically allocating to abroad market index strategy. A reasonable common sense question – why allocate to growth given the evidence that it is an inferior exposure?

Perhaps (our cynical view on this is) by allowing for ‘active’ allocation in each of these segments, the investment manager or consultant can distract the client from the analysis which is really relevant, which is the asset allocation decision in the first place!

Roger G. Ibbotson and Paul D. Kaplan, Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?, The Financial Analysts Journal, January/February 2000