While academics have previously tackled this topic, achieving mixed results, the GFI study – which was conducted by Raghavendra Rau, a professor of finance at Cambridge University – claims to have analysed the data over a longer time-horizon than prior literature.
Importantly, Rau says, the data spans a wide range of asset classes including real estate and commodities, and covers 1991 to 2011 – a period which includes the so-called dotcom bust of 2001, as well as the more recent global banking/sovereign debt crisis.
One of the study’s key findings is that “skilled investors” should focus on asset allocation strategies, given the greater dispersion of returns – especially during economic crises.
It concludes: “The most important periods for asset allocation from 1991 to 2011 were February 1991, during the Gulf War; August 1998, when Russia defaulted; March 2000, the beginning of the bursting of the dotcom bubble; and September 2008, when Lehman Brothers collapsed near the start of the subprime mortgage crisis.
“By contrast, only the dotcom bubble was an important period for security selection.”
A copy of Asset Allocation vs. Stock Selection: Evidence from a Simulation Exercise can be downloaded here.
