28th November 2025
It is often cited that 90% of a portfolio’s returns are determined by asset allocation. The veracity of the claim has been questioned by academics over the years, but this hasn’t deterred lots of investors from placing the asset allocation decision at the heart of their investment process.
From my experience working at a number of large Wealth Manager firms, this is how it works. Firstly, the firm’s investment committee (IC) establish a strategic asset allocation, which is primarily informed by risk, but also some assumptions regarding long run expected asset class returns. These inputs tend to be based on historic return, volatility and correlation data, and so are inherently backward looking. Lower risk portfolios will have more in bonds, higher risk ones more in equities. The fact that the returns, volatility and correlations of different asset classes change overtime is inconvenient, but under this framework you’ve got to work with something right? With strategic asset allocation set, the IC will then meet on a periodic basis (let’s say quarterly) to discuss what is going on in the world. What are the firm’s views on inflation, GDP growth and interest rates. Where are valuations and investor sentiment. Tactical tilts to the strategic asset allocation will then be made based on these views. These are often expressed as overweights and underweights at the asset class level. Only once this is decided comes the decision on how to populate those different buckets. In other words, stock selection comes after asset allocation.
For arguments sake, let’s park questions over the 90% claim and just assume it’s accurate. That acceptance, to our minds, leads to a far more pertinent question. Even if asset allocation is responsible for 90% of returns, does that automatically mean asset allocation should be the major driver of portfolio construction?
We think the answer is a resounding ‘no’. As Yogi Berra (US baseball player and accidental philosopher) famously once said, “it’s tough to make predictions, especially about the future”. We think this is particularly the case when it comes to hard-to-forecast macro variables like inflation, growth and monetary policy. The ability to add value at this level is difficult and we happily hold our hands up and confess we have no particular edge versus the thousands of other investment firms and institutions scouring the data, reading the runes and building portfolios. As a result, we err away from making macro predictions.
Instead, our portfolios are built from the bottom up, with eventual asset allocation a function of individual fund selection combined with a sensible approach to diversification and risk management. Because we accept we can’t forecast the future, we want every investment to be imbued with a margin of safety. This leads to a granular focus on valuation and opportunity at the individual underlying fund level, with information gleaned from countless meetings with managers. Open-mindedness combined with this research-heavy and granular process throws up occasions where we might own an actively managed fund even though we have a dire view of return prospects at the asset class or index level (this also brings into sharp relief our blog from last week discussing the informational content of simple asset allocation breakdowns for funds like ours). Operating within the straight jacket of a top-down asset allocation framework raises the possibility of missing out on idiosyncratic and security specific opportunities like this, effectively shrinking the investable universe and constraining idea generation.
If making predictions and monetising them consistently is hard, then overconfidence in one’s ability to accurately forecast is dangerous. Having previously worked at firms that employed a predominantly top-down asset allocation process, joining Hawksmoor Fund Managers with its primary focus on the portfolios individual building blocks was a liberating experience, opening my eyes to the behavioural pitfalls that top-down approaches entail, but also freeing up time and bandwidth to focus on areas where you believe you can add value. Not having to have a view on every utterance from the Fed or on the latest PMIs means we can concentrate on what we think really drives the performance of our Funds.
In this regard, micro is, we believe, easier than macro. Analysing the return drivers of an individual fund, assessing the skill of an active manager or understanding how a strategy of engagement might help realise value at an individual investment trust are all likely to be more consistent sources of alpha than a decision on whether or not we should be ‘underweight’ or ‘overweight’ a particular region.
Whether asset allocation does or doesn’t explain 90% of portfolio returns is moot. We do, however, have 100% conviction that bottom-up fund selection is the right way to build portfolios. The process also results in positioning that looks quite different to those that employ a top-down approach which tend to have a bias towards benchmark heavyweights and larger, more liquid markets. Recognising that we haven’t solved investment, this means our Funds also blend extremely well with more traditional, asset-allocation led solutions.
Ben Mackie – Senior Fund Manager
For professional advisers only. This document is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”), the investment manager of the MI Hawksmoor Distribution Fund (“Fund”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. The Fund’s Authorised Corporate Director, Apex Fundrock Ltd (“Apex Fundrock”) is also authorised and regulated by the Financial Conduct Authority. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contain have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Hawksmoor, its directors, officers, employees and their associates may have a holding in the Fund. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC25584.
