Strategic asset allocation, we believe, is the single most important determinant of investment success. Brinson, et al., found that more than 90% of the variability of fund returns is explained by the variability of policy returns.  Alpha and tactical expressions can help on the margin, but they are, typically, several degrees of magnitude less important than the strategic asset allocation choices reflected in a policy portfolio. In this paper, we first review the importance of a well-designed strategic asset allocation scheme. We show that it is an important component of both good risk management and successfully achieving investment objectives. To illustrate this, we study the performance of PanAgora’s Risk Parity strategy across the different macroeconomic environments we have navigated over the past 15 years. In the second half of the paper, we evaluate the role of tactical allocation. While tactical expressions and active management can be additive when done well, the breadth of tactical asset allocation as well as the general moorings of the efficient market hypothesis expose it for the illusion it often is. We consider the fundamentals of today’s macroeconomic environment: economic recovery, vaccine rollout, extremely accommodative monetary policy, and aggressive fiscal stimulus. We assess whether there is easy money to be made by going long equities and real assets, versus nominal assets, or is this simply the song of the Sirens leading us all to peril? Read more here.

Request Paper