Q3 commentary from Richard Pzena’s Pzena Investment Management. Very interesting discussion of asset allocation:
Is the answer to this challenging question simply to choose low volatility combined with stable returns or is the answer to select an option that produces the best long-term real growth of principal?
When investors are looking for a hedge fund to invest their money with, they usually look at returns. Of course, the larger the positive return, the better, but what about during major market selloffs? It may be easy to discount a hedge fund's negative return when everyone else lost a lot of money. However, hedge Read More
To address this issue we have attempted to model three different time periods over the last 22 years to compare the results of a 100% allocation to value equities (cheapest quintile price to book value excluding the most volatile stocks), 100% to bonds (10 year U.S. Treasury Bonds) or 100% to hedge fund of funds (HFRI Fund of Funds Composite Index).
In our analysis we made the following assumptions about our spending rate:
1. Initial spending rate is 4% of the beginning principal
2. Real spending growth is 2% per year (in excess of inflation)
3. Funds are needed equally over the course of the year
The three scenarios we considered were:
1. Starting at the beginning of 1990 and capturing a full cycle of equity returns
2. Buying at the absolute top of the internet bubble (3/1/2000)
3. Buying just prior to the financial meltdown (11/1/2007)
Link to full letter.