ValidFi's  Instablog

Studies have shown asset allocation is the most important determinant factor in a mutual fund's performance: according to a study by Gary Brinson, Randolph Hood and Gilbert Beebower, asset allocation strategies are responsible for over 90% of variations in portfolio performance.

The tumultuous 2008 taught us an important lesson: static asset allocation over diversified assets is not effective enough to shield us from severe market loss. What's called for is tactical asset allocation which re-allocate capital based on the current and future economic and market conditions. In the previous articles, we introduced several tactical asset allocation strategies including cross-asset momentum strategies. Those strategies are based on quantitative price or value evaluation. Another way is to simply follow the great investors' asset allocation decisions.

Asset allocation in investment is akin to capital allocation in business. Great asset allocators, though not as famous as great stock pickers such as Warren Buffett, are widely followed by the public based on their asset and sector calls. Unfortunately, other than in a few large institutions, such information is random and untimely for most public investors. What we need is to develop a platform so that we could identify a few Gurus and then follow their asset allocations consistently.

The following table lists a few great investors who have done very well in terms of their asset allocation in the past several years:

There are several ways to follow the Gurus asset allocation decisions.

• Use the mutual funds quarterly filing (N-Q) and figure out the asset allocations of those funds managed by Gurus. One could use Morningstar or Lipper's mutual fund services (free information on morningstar.com) for this purpose. The major drawbacks are 1). the information is updated only quarterly (thus no information during the quarter) and usually late. 2). the assets classified by these services are just the major assets such as stocks and bonds, not as much as other important asset classes such as emerging markets, high yield debts etc.

• Invest in clone funds such as IndexIQ's recently introduced ETF QAI or Hedge Macro Index Tracker MCRO. Investors could also tap some institutional funds such as Morgan Stanley's hedge fund replication Altera.

• If you want to follow the Gurus' decisions and construct your own portfolios based on the information, ValidFi's Guru Allocation Watch service could be useful. Over there, users could find out the real time asset exposures for a given mutual fund. ValidFi uses its advanced proprietary beta regression technique to analyze the funds' price behavior to derive the up to date asset exposures for a given set of asset indexes. In addition to individual fund asset exposure finding, ValidFi also provides a live strategy called Guru Asset Allocation Clone which bases on the derived up to date asset allocations for a list of famous asset allocation funds to invest in a diverse set of assets including US equities (such as SPY or IWM), foreign equities (EFA), emerging market equities (EEM or VWO), US REIT (IYR or VNQ), commodities (GSG or DBC and gold GLD) and various fixed income assets (HYG or JNK, CFT, LQD, SHV, SHY, IEF, TLT, TIP, MBB, BWX, PCY).

   

A natural question that arises here is how to select great asset allocation Gurus and their funds. ValidFi is planning to release asset allocation fund ranking in the near future. Interested readers are encouraged to watch this column and validfi.com for the announcement.

From time to time, we will comment on Gurus' asset outlook based on ValidFi's asset allocation analysis. It is especially important right now as markets are in a critical juncture.

Disclosure: No positions