CAMBRIDGE, Mass. - Two researchers are challenging the conventional wisdom that asset allocation is a far more important investment decision than stock selection.
"Contrary to the widely held view, it turns out that choosing stocks within the equity component of a portfolio is substantially more important than choosing a portfolio's exposure among stocks, bonds and cash," wrote Mark Kritzman, managing partner of Windham Capital Management Boston LLC, and Sebastien Page. Mr. Page is senior associate at State Street Associates, a research venture of State Street Global Advisors, Windham and FDO Partners LLC. Both Windham and State Street Associates are based in Cambridge, Mass.
Normally, the news that stock-picking beats asset allocation by a mile might change the way thousands of investment professionals would go about making investment decisions.
The problem, according to some finance academics, is that Messrs. Kritzman and Page unintentionally fixed the race.
A flaw in their methodology "gives you asset allocators who aren't doing any asset allocation," said John Y. Campbell, a partner with Arrowstreet Capital LP and the Otto Eckstein Professor of Applied Economics at Harvard University, both in Cambridge.
"I think they've handcuffed the asset allocator," echoed Roger Ibbotson, chairman of Ibbotson Associates Inc., Chicago, and a professor at the Yale School of Management, New Haven, Conn. "You just can't make any conclusions because (the study is) so dependent upon how they did their methodology."
If the critics are right, the results of the research might just be a flash in the pan.
But Mr. Kritzman, research director of the Association for Investment Management and Research's research arm, is a highly regarded quantitative manager.
Plus, the research is being published in some of the most prominent U.K. and U.S. academic journals.
The first of two papers, which looks at the tradeoffs in importance between asset allocation and security selection, appeared last year in the British Journal of Asset Management. The second paper, which expands the work to include country allocation, global and country sector selections, is slated for publication in the summer issue of the Journal of Portfolio Management.