From market timing to his indelicate phrase about investors reaching a "puke point" in these recent years of market downfall, A. Gary Shilling offers an interesting retrospective of the bull market that ran from August 1982 to March 2000. Among what he calls the follies of that recent era, Mr. Shilling debunks the investment strategy of pigeonholing asset allocation, i.e., the belief that "investment allocation is a precise science."
"So to maximize risk-adjusted returns, invest x% in small-capitalization value stocks, y% in big-cap growth stocks, etc.," he writes in Insight, an economic research and investment strategy report produced by his firm, A. Gary Shilling & Co., Springfield, N.J.
"Now it's clear that this strategy doesn't work," he writes. "Some stock sectors may just be unattractive for years when there is no steep upward trend in the overall market."
"Investors are learning the hard way asset allocation isn't an exact science, but an art."
Such criticism of specialized portfolios isn't new. Some pension funds already have moved away from them to some extent.
In 1995, GTE Investment Management Corp. began what it termed a strategic partnership network of money managers involving four major firms given broad latitude for a global multiasset strategy and a big share, 30%, of the company's then $12 billion fund.
Later that year, IBM Corp. and NYNEX Corp. were reported to be among pension funds exploring global multiasset portfolios.
Even earlier, Times Mirror Co., in 1993, adopted a global multiasset approach for its $1 billion pension fund, a type of outsourcing to cope with a shortage of in-house staff.
In 1999, General Motors Investment Management Corp. began exploring making tactical asset allocation decisions for the entire $70 billion fund.
More recently, in 2000, Richard M. Ennis, chairman of Ennis Knupp & Associates Inc., suggested pension funds scrap narrowly defined specialized money management, acknowledge it has failed, and embrace what he calls a "whole portfolio" concept.
Consultant Richards & Tierney Inc., agreeing the model for pension investment management needs to be changed, has taken different approach, although still believing strongly in active management. The firm "doesn't pigeonhole managers by style," Thomas M. Richards, principal, said in 2002. "Our primary criterion is whether the manager can produce investment value-added. We do not impose arbitrary constraints in this identification process" like growth or value.
Along with pigeonholing, Mr. Shilling criticizes relying too much on relative performance in measuring managers. "In the future, investors will, no doubt, favor managers who first and foremost produce steady positive returns," he writes. "Topping benchmarks will only count if the clients' assets rise."
Aside from the multiasset trend of the 1990s, the newer move to absolute return approaches, such as hedge funds and long-short strategies, is part of that rebellion against pigeonholing and relative performance. But relative return deserves a qualified defense. Certainly, no investment strategy should be judged in the short term, so long as the manager exhibits skill within the style and sponsors believe that part of the market has a favorable outlook.
In the longer term, pension executives generally have reassessed relative performance in absence of absolute returns, as witnessed by their changing money managers. That kind of restructuring was true during the bull market and undoubtedly will continue to be practiced.