Morningstar Advisor - February/March 2013 - (Page 58)

Gray Matters The Existence of Market-Timing ‘Intelligence’ By David Blanchett Active managers have exhibited skill in making asset-class decisions, our study shows. Market volatility and low equity returns over the past decade have led many investors to seek new ways to invest. Tactical assetallocation approaches, where changes are made to the portfolio allocation in response to market forecasts, hold a lot of appeal for many of these investors. The goal with a tactical strategy is to correctly time the market, or buy low and sell high, to achieve higher risk-adjusted performance than what an investor would achieve through a strategic 58 Morningstar Advisor February/March 2013 asset-allocation, or buy-and-hold, approach. While the appeal of market timing is strong, the ability of portfolio managers to correctly time the market (the market-timing “intelligence” of the portfolio manager) is up for debate. In this article, we will explore the ability of portfolio managers of actively managed balanced mutual funds to make “intelligent” decisions with respect to the historical asset- class exposures in the portfolio. We want to determine whether managers are able to add value by correctly timing portfolio decisions. The Importance of Asset Allocation In Brinson, Hood, and Beebower’s research paper, “Determinants of Portfolio Performance” (1986), perhaps the most well-known (and often miscited) paper on asset allocation, the authors concluded that the variance of a portfolio’s asset allocation, or “policy” return, explained

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2013

Morningstar Advisor - February/March 2013
Letter From the Editor
Social Media, the Old- Fashioned Way
Do You Use Active Strategies?
Youth Appeal
How to Buy the Unloved 2013
Morningstar Managers of the Year
Investments á la Carte
Investment Briefs
Approaches to Absolute-Return Investing
In Agriculture, It’s Good to Be Strong
Yes, There Are Good Active Funds
The Decoupling
Where It Could Pay to Be Active
The Active Fund That Defies Obsolescence
The Epitome of an Active Manager
Lines of Communication
The Existence of Market Timing ‘Intelligence’
A Route to Commodities that Bypasses the Futures Market
Best Positioned for Health-Care Reform
Diversified Stock Funds That Earn Their Stars
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
A Twisted Debate

Morningstar Advisor - February/March 2013