Failure to Adjust Asset Allocation in Changing Markets Can Lead to Disappointing Investment Returns, According to Mellon Capital

Researchers at BNY Mellon Boutique Advise Dynamic Portfolio Management

Oct 25, 2010, 07:53 ET from BNY Mellon

SAN FRANCISCO, Oct. 25 /PRNewswire-FirstCall/ -- Investors who fail to adjust their asset allocations to changing market conditions are likely to achieve disappointing returns, according to a recent report by Mellon Capital Management Corporation, part of BNY Mellon Asset Management.

"We believe the inability of a static asset allocation mix to accept new information was the main culprit behind the unrealized return expectations for many institutional investors," said Jonathan Xiong, director, global asset allocation, for Mellon Capital.  "Investment managers need to dynamically change their asset allocations within a portfolio to reflect the most recent changes in expectations."

Most public, corporate and endowment portfolios over the last decade have adhered to a static asset allocation, with the only changes in asset class exposures driven by market movement, according to the paper.  

"A fallacy of the static allocation approach is that it assumes return expectations will not change, regardless of capital market or macro economic conditions," said Xiong.  "Credit spreads and equity risk premiums can be volatile, and our studies indicate that changes in these factors have affected returns.  Our research concludes that a five percent change in expected equity returns has the potential to shift the optimal asset allocation by more than 80 percent."

Among the reasons cited by the report for failing to adapt to new information are the sheer size of institutional portfolios, internal resource constraints, and the board approval process.  However, the report also notes that many investors have allocated capital to tactical asset allocation strategies that, combined with their policies and target asset allocations, can closely mirror a dynamic asset allocation process.

Notes to Editors:

Founded in 1983 by innovators in the investment management field, Mellon Capital Management Corporation applies a disciplined and analytical approach to global investment management strategies. As of September 30, 2010, the firm had $191 billion in assets under management, including assets managed by dual officers of Mellon Capital Management Corporation , The Bank of New York Mellon and The Dreyfus Corporation, and $9.2 billion in overlay strategies. Additional information about Mellon Capital is available at  It is part of BNY Mellon Asset Management, one of the world's largest asset managers.

BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets.  BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team.  It has $24.4 trillion in assets under custody and administration and $1.14 trillion in assets under management, services $12.0 trillion in outstanding debt and processes global payments averaging $1.6 trillion per day.  BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).  Additional information is available at

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