Research Review | 1.17.2013 | Asset Allocation

Strategic Asset Allocation: The Global Multi-Asset Market Portfolio 1959-2011
Ronald Doeswijk (Robeco), et al.| November 2012
The portfolio of the average investor contains important information for strategic asset allocation purposes. This portfolio shows the relative value of all assets according to the market crowd, which one could interpret as a benchmark or the optimal portfolio for the average investor. We determine the market values of equities, private equity, real estate, high yield bonds, emerging debt, non-government bonds, government bonds, inflation linked bonds, commodities, and hedge funds. For this range of assets, we estimate the invested global market portfolio for the period 1990-2011. For the main asset categories equities, real estate, non-government bonds and government bonds we extend the period to 1959-2011. To our understanding, we are the first to document the global multi-asset market portfolio at these levels of detail for such a long period of time.

Value and Momentum Everywhere
Clifford Asness (AQR Capital Management), et al. | June 2012
We study the returns to value and momentum strategies jointly across eight diverse markets and asset classes. Finding consistent value and momentum premia in every asset class, we further find strong common factor structure among their returns. Value and momentum are more positively correlated across asset classes than passive exposures to the asset classes themselves. However, value and momentum are negatively correlated both within and across asset classes. Our results indicate the presence of common global risks that we characterize with a three factor model. Global funding liquidity risk is a partial source of these patterns, which are identifiable only when examining value and momentum simultaneously across markets. Our findings present a challenge to existing behavioral, institutional, and rational asset pricing theories that largely focus on U.S. equities.
Risk-Factor Diversification and Portfolio Selection
Scott Pappas (Griffith University), et al. | August 2012
Traditionally, investment portfolios have been constructed with a focus on what asset classes to invest in and how much to invest in each. Recent research, however, has shown that focusing on risk-factor allocations, rather than asset class allocations, can result in better risk-adjusted portfolio performance. The existing literature has focused on simple allocation strategies such as equal-weighted and equal-risk-weighted portfolios. In addition to these simple allocation techniques, this paper compares the performance using mean-variance analysis, and presents evidence that the outperformance of risk-factor diversification may not be as conclusive as has been previously presented in the literature. While confirming some of the prior findings on risk-factor diversification, the research shows that previous findings may be subject to strong caveats. Specifically, the evidence suggests that the selection of risk-factors, portfolio selection techniques and time-period have a large impact on performance outcomes.
Investing Under Inflation Risk
George Crawford and Jim Kyung-Soo Liew | August 2012
Inflation, a quiet but growing concern, is complicated by its unpredictability in timing and severity. A survey of 110 years of inflation data suggests that Treasury Bills track inflation better than equities or bonds, and this result is robust across 19 countries. In most periods of high inflation in these countries, however, equities produced much higher, though more volatile, returns, but in some periods returns were much lower. Observation of periods of high inflation in the US and other countries suggests that while Treasury Bills track inflation best optimal hedging portfolio composition varies over time. In the more recent periods from 1980 to June 2012, however, evidence exists for inclusion of alternatives to Treasury Bills such as HML, SMB, and some “Stealth Fighters.” Furthermore, within the most recent period, evidence suggests that TIPs and trend-following dynamic strategies, as proxied by CISDM EW CTA, appear to help track inflation in the absence of Treasury Bills. Consideration of gold and real estate suggests that these asset classes, although popular, are unlikely to be good candidates to hedge against inflation. Our results suggest that inflation can be tracked, but methodologies that include dynamic weighting schemes should be employed since the relationship amongst inflation, assets and investment strategies is very complex.
Population Aging and the Effects on Real Estate and Financial Asset Returns
Huong Vina Nguyen (Brandeis University) | May 2012
This paper investigates the effects of each age group in the population on housing prices, the returns on different classes of bonds and the excess returns on equity across countries and over time. Previous empirical research focusing on a single country found a negative effect of the ratio of the old to working population on the returns to all assets. However, a more complete framework that encompasses both individuals’ consumption-saving decision and portfolio allocation may advance our understanding of how population aging influences asset returns. I construct a high-order polynomial estimation of the demographic structure and then run an unbalanced panel regression with time fixed effects on the change in housing prices (37 countries), total returns of equity indices (53 countries) and total returns on bonds (53 countries). The results show that population aging has the strongest effect on housing prices. Real returns on housing and bond decline as the population gets older. On the other hand, equity premium is higher in countries with relatively older population indicating that risk aversion increases with age. As a robustness check, the joint estimation results using Seemingly Unrelated Regressions are consistent with the individual regressions.

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