My view on investment management

My view on investment management

It is has been long held that the asset allocation policy may account up to the 90% of the variation in returns (Brinson, Hood, & Beebower, 1995). However, other studies argued that about three-quarters of such variation are explained by the market movement, and the remaining by the equal contribution of the specific asset allocation and active management (Ibbotson, 2010).

Roberto Garrone

Therefore, investment policy (included asset classes and determination of normal weights) and investment strategy (market timing and overweight of winners) are equally important to reduce the variance of returns, whereas the level of return is almost entirely explained by a passive asset allocation policy. As a consequence, global diversification seems to be the best strategy to reduce most of the variance derived from market movement, especially when considering the tendency of markets to crash together. In contrast with the fact that crashes are not softened by global diversification on the short-term, it is accepted that long-term results are driven by the global economic performance (Asness, Israelov, & Liew, 2011). Subsequent studies analyzed the diversification benefits on the country dimension as well as on the cross-country correlation measure (Christoffersen, Errunza, Jacobs, & Langlois, 2012), and considered the case of Emerging Markets (L. I. N. Wenling, 2013). 

Attempts at market timing involve tactical asset allocation and re-balancement to achieve the best fund’s beta for the expected market; especially in volatile markets, the best day-by-day results in risk management are achieved extracting relevant patterns from daily return series (Berger, 2017). To realize such results, funds managers heavily rely on valuation, geopolitical and macroeconomic tools. Indeed, after 1998, most funds shifted their strategies from country selection to global diversification, sector rotation and style selection supported by increasing financial and economic integration and reinforced by worldwide earnings attribution (L. Wenling, Lisa, Phillip, & Mark, 2004). Behavioral studies documented the performance of style combination strategies of diversification and timing for value and momentum using a simple sentiment indicator, and evidenced the superior results against country selection (Desrosiers, L’Her, & Plante, 2004). Constant volatility momentum (Barroso & Santa-Clara, 2015; Daniel & Moskowitz, 2016) and risk parity (Asness, Frazzini, & Pedersen, 2012) can be employed as defensive strategies.

The factors of production (labor, income, capital, and human capital) and the state of technical knowledge of a country are the inputs to the production functions that express the link between such inputs and the amount of output produced in the economy. Because the stock market represents ownership of the productive capital in the economy, the aggregate stock market must be driven by the return earned on the capital invested in the real economy. According to the neoclassical theory of optimal economic growth, the long-run growth rate of real output equals the growth rate of the labor force plus the rate of labor productivity growth (Dornbusch & Fisher, 1978). Furthermore, studies highlighted the relevance of economic relations (income to labor and capital, income to labor and asset’s return, productivity and international relative prices, productivity and capital investment, productivity and terms of trade) with respect to the level of observed diversification (Heathcote & Perri, 2013).

The Italian Regulation

Generic financial advice consists of the provision of operational indications of financial allocation with reference to types of financial instruments. This type of activity carried out by the Professional does not integrate an investment advisory activity, as qualified by art. 1, paragraph 5, letter f) and defined by the same article in paragraph 5 septies, d.lgs. 24 February 1998, n. 58 and subsequent amendments (TUF). Generic financial advice does not constitute an investment service and is not subject to the regulations of the TUF, but identifies an activity that can be freely exercised, as it is not covered by a legal reservation. This activity is not subject to the supervision of Consob or that of the Body (OCF). The Generic Financial Advisory Contract has as its object the provision by the Professional of the generic financial advisory service, provided through the construction of diversified model financial portfolios in different asset classes and elaborated with regard to different risk profiles, as well as multiple combinations of risk / return. The general composition of financial portfolios is constantly monitored and subject to revision in the light of financial market developments. The operational suggestions for buying / selling, generically formulated by the Professional in the exercise of the activity in question, do not constitute an offer to the public and solicitation of investments, nor do they integrate the investment advisory service as regulated by the TUF, since, regardless of the personal characteristics of the Client, they do not concern personalised recommendations regarding the purchase / sale of certain financial instruments.


Asness, C. S., Frazzini, A., & Pedersen, L. H. (2012). Leverage Aversion and Risk Parity. Financial Analysts Journal, 68(1), 47-59. 

Asness, C. S., Israelov, R., & Liew, J. M. (2011). International Diversification Works (Eventually). Financial Analysts Journal, 67(3), 24-38. 

Barroso, P., & Santa-Clara, P. (2015). Momentum has its moments. Journal of Financial Economics, 116(1), 111-120. doi:10.1016/j.jfineco.2014.11.010

Berger, T. (2017). Extracting the relevant trends for applied portfolio management. Paper presented at the EFMA Annual Meeting, Athens. 

Brinson, P. G., Hood, L. R., & Beebower, G. (1995). Determinants of Portfolio Performance. Financial Analysts Journal, 51(1), 133-138. 

Christoffersen, P., Errunza, V., Jacobs, K., & Langlois, H. (2012). Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach. The Review of Financial Studies, 25(12), 3711-3751. 

Daniel, K., & Moskowitz, T. J. (2016). Momentum crashes. Journal of Financial Economics, 122(2), 221-247. doi:

Desrosiers, S. p., L’Her, J.-F. o., & Plante, J.-F. o. (2004). Style Management in Equity Country Allocation. Financial Analysts Journal, 60(6), 40-54. 

Dornbusch, R., & Fisher, S. (1978). Macroeconomics (Sixth ed.). New York: Mc Graw-Hill.

Heathcote, J., & Perri, F. (2013). The International Diversification Puzzle Is Not as Bad as You Think. Journal of Political Economy, 121(6), 1108-1159. doi:10.1086/674143

Ibbotson, R. G. (2010). The Importance of Asset Allocation. Financial Analysts Journal, 66(2), 18-20. 

Wenling, L., Lisa, K., Phillip, H., & Mark, T. (2004). Changing Risks in Global Equity Portfolios. Financial Analysts Journal, 60(1), 87-99. 

Wenling, L. I. N. (2013). Is There Alpha in Institutional Emerging-Market Equity Funds? Journal of Portfolio Management, 39(4), 106-117. 

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