1985-1994

Determinants of Portfolio Performance
Gary P: Brinson, L. Randolph Hood, and Gilbert L. Beebower recent study indicates that more than 80 per ,cent of all corporate pension plans with as.sets greater than $2 billion have more than 10 managers, and of all plans with assets greater than $50 million, less than one-third have only one investment manager. ~ Many funds that employ multiple managers focus their attention solely on the problem of manager selection. Only now are some funds beginning to realize that they must develop a method for delineating responsibility and measuring the performance contribution of those activities that compose the investment management process---investment policy, market timing and security selection. 2 The relative importance of policy, timing and selection can be determined only if we have a clear and relevant method of attributing returns to these factors. This article examines empirically the effects of investment policy, market timing and security (or manager) selection on total portfolio return. Our goal is to determine, from historical investment data on U.S. corporate pension plans, which investment decisions had the greatest impacts on the magnitude of total return and on the variability of that return. A Table I illustrates the framework for analyzing portfolio returns. Quadrant I represents policy. Here we would place the fund's benchmark return for the period, as determined by its long-term investment policy. A plan's benchmark return is a consequence of the investment policy adopted by the plan sponsor. Investment policy identifies the long-term asset allocation plan (included asset classes and normal weights) selected to control the overall risk and meet fund objectives. In short, policy identifies the entire plan's normal portfolio. 4 To calculate the policy benchmark return, we need (1) the weights of all