Asset Allocation Theory and Practice in Australian Investment Management

Abstract

Asset allocation is the decision on how much of the investment portfolio to place in each of the broad asset classes (i.e., cash, fixed-interest securities, property, equities). It is a key decision area in the investment management industry, where professional investors manage pooled investments. This study sought to identify any dichotomy between theory and practice of asset allocation in the Australian investment management industry. It surveyed the available body of research on asset allocation consisting of Modern Portfolio Theory from the seminal Markowitz mean-variance formulation to subsequent research strands, and established that academics still believe in their relevance. An online survey among practitioners established that while there is a high level of awareness, there is a low level of usage of asset allocation theory and theory-based methods in the industry. Recommendations mostly revolving around improving the interaction between academia and industry are made that may help reduce the theory-practice dichotomy. Limitations of the study are discussed as well as future areas for related research.