As a result of poor asset allocation decisions by 401(k) participants, 72% of all plans now offer target date funds, and participants heavily invest in them. Here, we study the characteristics and performance of TDFs, providing a unique view by employing data on TDFs holdings. We show that additional expenses charged by TDFs are largely offset by the low-cost share classes they hold, not normally open to their investors. Additionally, TDFs are very active in their allocation decisions and increasingly bet on nonstandard asset classes. However, TDFs do not earn alpha from timing or their selection of individual assets.

Empirical studies of the modern theories of bond pricing typically choose proxies for the state variables in a rather arbitrary fashion. This paper empirically analyzes the question of the optimal spot rates to use as state variables. The authors' findings indicate that the four-year spot rate serves as the best proxy in the one-state-variable model. In the case of the two-state-variables model, the six-year rate and eight-month rate are identified as best. Tests of the out-of-sample prediction ability indicate that their model is superior to F. R. Macaulay's duration model and alternative proxies for state variables.

This paper explores investors portfolio behavior when security returns can be described by one of the forms of the CAPM model and investors pay taxes. The conditions under which an investor holds the market portfolio are explored. In addition the extent to which securities are held in proportions which differ from market weights are shown to be functions of tax rates, dividend policies, and the variance covariance structure between all securities.

This is the first study to examine both how well plan administrators select funds for 401(k) plans and how participants react to plan administrator decisions. We find that, on average, administrators select funds that outperform randomly selected funds of the same type although they do not outperform index funds of the same type. When administrators change offerings, they choose funds that did well in the past, but, after the change, added funds do no better than dropped funds. Plan participants in aggregate change their allocation decisions in a way that accentuates the changes in allocation caused by returns. The change in allocation due to the investment of new money and interfund transfers is about the same size, and in the same direction, as the change due to returns. Participant allocations in aggregate do no better than naïve allocation rules, such as equal investment in each offering.

[We investigate the informational efficiency of mutual fund performance for the period 1965-84. Results are shown to be sensitive to the measurement of performance chosen. We find that returns on S&P stocks, returns on non-S&P stocks, and returns on bonds are significant factors in performance assessment. Once we correct for the impact of non-S&P assets on mutual fund returns, we find that mutual funds do not earn returns that justify their information acquisition costs. This is consistent with results for prior periods.]

Despite the size and importance of separately managed accounts (SMAs) and collective investment trusts, their characteristics and performance have not been studied in detail. We show that separate account performance is similar to that of index funds and superior to that of actively managed mutual funds. Management supplies a benchmark for each separate account. When the management-selected benchmark is used to measure performance, performance is significantly overstated. Despite this, investors react to differences in performance from the management-preferred benchmark in choosing among SMAs. Finally we find variables that explain both the cross section of alphas and the cross section of cash flows.

In this paper, the authors use monthly holdings to study timing ability. These data differ from holdings data used in previous studies in that the authors’ data have a higher frequency and include a full range of securities, not just traded equities. Using a one-index model, the authors find, as do two recent studies, that management appears to have positive and statistically significant timing ability. When a multiindex model is used, the authors show that timing decisions do not result in an increase in performance, whether timing is measured using conditional or unconditional sensitivities. The authors show that sector rotation decisions with respect to high-tech stocks are a major contribution to negative timing.

Edwin J. Elton, Martin J. Gruber, Christopher R. Blake; Common Factors in Active and Passive Portfolios, European Finance Review, Volume 3, Issue 1, 1 Janu

In this article we have reviewed “Modern Portfolio Analysis” and outlined some important topics for further research. Issues discussed include the history and future of portfolio theory, the key inputs necessary to perform portfolio optimization, specific problems in applying portfolio theory to financial institutions, and the methods for evaluating how well portfolios are managed. Emphasis is placed on both the history of major concepts and where further research is needed in each of these areas.