McGraw-Hill

CHAPTER 1 0
High-Definition Style
Rotation*
Distinguishing between subtle style attributes pays ofl
According to william Sharpe (1992), p. 9:
Those concerned with [style] distinctions have focused most of their
research on long-run average return differences; that is, they have
asked whether small stocks or value stocks “do better than they
should” in the long run. Less attention has been paid to likely sources
of short-run variability in returns among such groups.
While most active managers have focused on adding value via stoc
selection, research suggests that, for large, well-diversified multimanager
plans, stock selection adds little value [&, for example,
Brinson, Singer, and Beebower (1991)l. Rather, as Brinson and his ce
authors have documented, is it asset allocation that has the largest impact
on investment fund returns. 90 Over percent of an average fund’s
total return variance can be traced to its investment policy, the longterm
allocation of its investme& across asset classes.
Consultants and funds have lately become more concerned
with the allocation of investments within an asset category-in particular,
equities. How much does an equity portfolio’s allocation t
different categories of equity-growth, value, large-cap, smallcap-contribute
to its total return?
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