Asset Allocation within Swedish Mutual Funds: The Contribution to Portfolio Performance

Abstract: The purpose of this paper is to follow in the tracks of the Brinson et al (1986, 1991) and the Ibbotson and Kaplan (2000) studies and investigate the importance of asset allocation to mutual fund performance and the variation of the same. We have chosen to study 46 Swedish balanced mutual funds over a five year period, the time period was chosen as to balance between a long enough time period and large enough sample. We avoid classical misconceptions by breaking the issue down into three distinct questions; i) How much of the variability of returns across time is explained by the asset allocation policy?, ii) How much of the variation in returns among funds is explained by differences in policy?, and iii) What portion of the return level is explained by policy returns? We find that more than 92 percent of the variation in returns over time of any one fund is explained by asset allocation policy, roughly 49 percent of the variation among funds and roughly 131 percent of the return level is explained, on average, by the policy return level or the return level of the corresponding asset allocation portfolio derived from return-based style analysis, developed by William F. Sharpe. These results are in line with previous research and thus confirm the importance of asset allocation. For private and institutional investors alike, this means that there should perhaps be even more focus on asset allocation when forming an investment portfolio given that the policy or strategic asset allocation is such a powerful determinant of performance and variation of the same.