Determinants of Portfolio Performance

In order to delineate investment responsibility and measure performance contribution, pension plan sponsors and investment managers need a clear and relevant method of attributing returns to those activities that compose the investment management process—investment policy, market timing, and security selection. The authors provide a simple framework based on a passive, benchmark portfolio representing the plan's long-term asset classes, weighted by their long-term allocations. Returns on this "investment policy" portfolio are compared with the actual returns resulting from the combination of investment policy plus market timing (over- or underweighting within an asset class). Data from 91 large U.S. pension plans over the 1974-83 period indicate that investment policy dominates investment strategy (market timing and security selection), explaining on average 95.6 percent of the variation in total plan return. The actual mean average total return on the portfolio over the period was 9.01 percent, versus 10...