Asset allocation shoot out

1

• Asset allocation shoot out
• Graham Rich, PortfolioConstruction ForumTim
  Farrelly, farrelly'sNeville Hathaway, Intrinsic
  Value InvestmentsStephen Hiscock, SG Hiscock
  Company Andrew Lord, Premium Strategic Planning
  Stephen Romic, DFS Advisory Services

2
The value of asset allocation

• Ibbotson Kaplan (2000)
• - Does asset allocation policy explain 40, 90,
  or 100 of performance?
• - 10-year return of 94 US balanced funds
• Asset allocation explained
• 90 of the variability in returns of a typical
  fund across time
• 40 of the variation of returns among funds (i.e.
  one fund vs another)
• on average 100 of the level of a funds return

3
Key paradigms for portfolio construction

• Equities for the long run
• Strategic asset allocation
• Income/growth asset split
• Diversification

4
Equities for the long run

• 5 yrs 10 yrs 20 yrs
• US equities vs bonds -6.9 -7.4 0.0
• UK equities vs bonds 2.3 -3.1 -0.1
• Japanese equities vs bonds -7.0 -6.7 -8.5
• Australian equities vs bonds 4.8 3.2 -0.4

5
Strategic asset allocation

• The tech bubbles (PEs of 100)
• International equities 2000 (PEs of 30)
• REIT bubble (PEs of 30)
• Chinese equity bubble (PEs 70)
• 2007 credit bubble
• 2008 commodity price bubble

6
Income and growth assets

• Income asset Return 2008
• Corporate bond funds -22.3
• Mortgage funds 5.4
• Australian REIT funds -47.2
• Global REIT funds -44.8
• Source FundData, retail unit trusts Jan-Dec
  2008

7
Diversification

• Return 2008
• Corporate bond funds -22.3
• Australian REIT funds -47.2
• Global REIT funds -44.8
• Australian equity funds -30.0
• International equity funds -21.4
• Resources -42.5Source FundData, retail unit
  trusts Jan-Dec 2008