Asset allocation dynamics and pension fund performance

Using a data set on more than 300 U.K. pension funds' asset holdings, this article provides a systematic investigation of the performance of managed p ortfolios across multiple asset classes. We find evidence of slow mean reve rsion in the funds' portfolio weights toward a common, time-varying strateg ic asset allocation. We also find surprisingly little cross-sectional varia tion in the average ex post returns arising from the strategic-asset-alloca tion, market-timing, and security-selection decisions of the fund managers. Strategic asset allocation accounts for most of the time-series variation in portfolio returns, while market timing and asset selection appear to hav e been far less important.