I have written plenty about John Hamilton’s speech at Melton Mowbray, But it was not just John on stage at the PLSA East Midlands event. Preceding John was the PLSA’s CEO and I’m pleased he’s sent me his slides for publication and comment.
You can download these slides to your device using this link
It is clear that Mund speaks off the same page as Hamilton and vice versa and though Mund billed himself as the “warm up” he had much to say.
PLSA has been responding to the recent budget, working with Emma Reynolds and will now be working with Torsten Bell who will be speaking at the PLSA conference (March 11-13).
25 out of the 60 staff that PLSA employ are employed in research into policy.
It is hard to imagine a time more exciting for the PLSA than a week when both the Prime Minister and the Chancellor will be talking about putting our great pension schemes to work for the sake of the country.
Mund and Hamilton were actually warning up for Reeves and Starmer. As well as Torsten Bell, PLSA have close relationships with other ministers, ,mentioned at Mowbray was Jim McMahon who looks after the Local Government Pension Scheme mandate. We should not forget that the PLSA is key to the delivery of reform in that area and LGPS has a massive surplus to work with.
The PLSA were , claimed Mund, apolitical, putting pensions before politics. He mentioned relationships with previous ministers, we hear today Jeremy Hunt supporting Rachel Reeves and Starmer calling for investment. 100% invested and 100% secure could (Hamilton’s aspiration) could be Hamilton and Mund’s aspiration for our pension schemes, it is certainly cross-political as an end to be pursued.
Much is happening in PLSA, in London, four groups are merging into one. PLSA will move with the time making itself relevant on line. For all the need to consolidate, PLSA continues to offer a nationwide outreach to pension people wherever they are in the UK.
I did note this in PLSA’s published response to the LGPS consolidation consultation:
“It is widely recognised that setting the right asset allocation is the most important factor in driving long-term investment returns for a scheme.”
PLSA’s scribes therefore still seem to be peddling the flawed Brinson research from the 1970s and 1980s in the mid 2020s.
Unfortunately, both the research conclusions and the interpretation of those conclusions are wrong.
The problem with Brinson’s analysis was its focus on explaining short-term portfolio volatility rather than total portfolio returns.
LGPS surely should be more concerned with the range of likely outcomes over their longer term investment planning horizon than the volatility of short-term returns.
Their pools will be contemplating LDI and buying gilts next?
Asset allocation policy explains only a small fraction of ten-year returns, but a large fraction of the variation of short-term returns.
Persistent small increments to periodic returns compound over time, while the volatility in returns grows more slowly (and often reduces) as the investment period is lengthened.
When analysing returns for short periods of time, it is easy to miss the significance of small persistent increments to returns in all the noise of marking to market.
To give more detail, several issues have been identified with the Brinson research, but those who trumpet that asset allocation trumps everything have probably never looked into these:
1. Empirical flaws
The original studies by Brinson et al. were based on a limited dataset of US mutual funds and pension plans, and did not have actual data on their strategic asset allocations.
They assumed that the 10-year mean average holding of each asset class was sufficient to approximate the appropriate normal holding, which is a significant limitation.
2. Methodological Flaws:
The studies did not account for the detailed mandates given to portfolio managers, which often include constraints that limit the potential impact of security selection.
This means the studies may have underestimated the importance of security selection in particular
3. General Applicability:
The conclusion that strategic asset allocation dominates other factors has been widely accepted by investment consultants (and the PLSA’s scribes) without sufficient empirical validation across different contexts and time periods.
Drawing general conclusions from such limited research is methodologically unsound.
4. Practical Implications:
The emphasis on strategic asset allocation has led to a more rigid approach in portfolio management, where the potential benefits of active management and security selection are often overlooked or constrained by the terms of market-relative mandates.
(Much so-called “active” management, however, may be closer to “passive” because of the use of market benchmarks and a fixation upon short-term volatility.)
Brinson’s research oversimplifies the complexities of portfolio management.
A more balanced approach, recognising the importance of both asset allocation and security selection, as well as market timing and transaction costs, is preferable.
Sources: such as Journal of Financial Planning: William W. Jahnke’s February 1997 piece, “The Asset Allocation Hoax.”
Thanks Byron
Agreed all,thank you.
Importantly, asset allocation is easier for consultants to roll out / sell and for investment managers to benchmark against. Actual investment is harder work, and the results are objective. Perhaps the consultant / IM manager influence at PLSA needs tempered more by what’s best outcomes for scheme members.?