Given the meltdown in so many asset classes over the last two years (remember: it was in the Summer of 2007 that the music first stopped without enough chairs), it has become somewhat fashionable to question the benefits of diversification across asset classes.
We've weighed in on this issue here and here, arguing that diversifying across relatively risky asset classes shouldn't be--and never should have been--seen as a means of reducing risk amid crisis conditions.
On Friday, Tom Lauricella filed another entry in the not-so-sure-about-this-asset-allocation-thing genre. As he so often does, Lauricella handles the material well, noting that correlations among risky asset classes had been rising before the recent meltdown. But the most important point about the last 24 months is that cash-equivalents and treasuries held up remarkably well, providing capital preservation and even some appreciation for investors who held them while risky assets cratered.
Lauricella's story opens with a Raymond James broker saying, AA-style, that he's "a recovering asset-allocationist." Near the end of his piece, Lauricella tells us about this broker's new style: more cash, and more flexible mandates for the active managers he hires for clients. We think this makes pretty good sense. As we've argued repeatedly in this space, asset allocation should be inexpensive and index-based; active management should be nimble and relatively unconstrained. In other words, they should be different, and purchased/pursued under different frameworks (not in the big, expensive mash-up of market- and manager-driven returns offered by most mutual funds).
Lauricella closes with this telling sequence about his example broker:
He says he is convinced there is a way to make diversification work. In fact, after the strains of last year, he says, many investments are behaving more like they did before 2008.
Asset allocation, he says, "might well have been injured....But I don't think it's gone forever."
No doubt. Properly understood and executed, asset allocation remains a perfectly intelligent strategy. To paraphrase Churchill's quip about democracy, asset allocation might be the worst thing out there...except all the others that have been tried.
One more note: Be sure to look at the WSJ's interactive graphic on asset-class correlations over the last 15 years. Good stuff.
Tom Lauricella, "Failure of a Fail-Safe Strategy Sends Investors Scrambling," Wall Street Journal, July 10, 2009