Modern portfolio theory suggests that some 80% of portfolio returns are driven by asset allocation, with other factors such as market timing on exit or entry and selecting the right stocks or funds perhaps accounting for the remaining 20%. That said, there are portfolio managers who are probably better at timing and selection than others.
Almost without exception, a significant amount of research, analysis and, therefore, resource goes into establishing an ‘ideal’ asset allocation – whether that is a long-term view (strategic) or a short-term view (tactical) or, often, both.
If such a high percentage of return is attributed to asset allocation, clearly it is important to get it right. With this in mind, it is interesting to note the wide disparity of asset allocations within a single Defaqto Comparator peer group.
If, for example, we look at the Defaqto Comparator Growth benchmark peer group, which currently contains 362 MPS portfolios – that is, 253 active and 109 passive – we can see the following:
“It is important to establish what kind of manager is running the portfolio and whether or not they are prone to taking big bets from time to time.
Source: Defaqto
Naturally, these numbers represent a snapshot in time – in this case as of 30 June 2025 – but some obvious numbers stand out. For one thing, some portfolio managers are prepared to take bigger bets compared with their peers.
Some of these bets will be right and some will be wrong – and no doubt contribute to the wide dispersion of returns for a cohort of portfolios that should be taking broadly the same level of risk.
Before going any further, then, it is worth taking a look at these dispersion of returns, for the same cohort of portfolios that make up the Defaqto Comparator benchmark:
Source: Defaqto
Significant reward for getting things right, then – but significant penalties for getting things wrong. And, why the big difference between active and passive? Perhaps a question for another day (Or another column? Ed).
Of course, without tracking over time we do not know if any of the asset allocation decisions as listed above were long-term or perhaps a day or two. Still, it does raise two very important questions: firstly, do you trust the portfolio manager to make these kinds of investment decisions?
And, even if you do, would you – or, more importantly, your client – be comfortable with such extreme positions. Portfolios will have been chosen on the basis of the clients’ attitude to risk and therefore suitability – should the portfolio manager deviate too far from what was initially expected?
The portfolio manager does have discretion but, with MPS portfolios, would not necessarily be aware of what else the client is invested in and it is possible that adviser and client have already taken steps to add risk or take a temporary defensive move elsewhere in their investments.
Depending on your position, therefore, it is important to establish what kind of manager is running the portfolio and whether or not they are prone to taking big bets from time to time. Defaqto has recently launched subsectors of the comparator benchmarks, enabling asset managers and advisers to look at either passive portfolios or active portfolios in isolation or, indeed, to compare against each other.
We can see from the table above that the exposure to each asset type, on average can be noticeably different. The one that jumps out is North American Equity with more than a five percentage-point difference, on average, between active and passive portfolios.
It is likely that passive investing is a little more restrictive than active, with less choice of affordable asset types. It is also likely that some passive portfolios are run on a passive/passive basis – that is, following a major index in terms of geography – which means the biggest economies will by default have the biggest exposure.
From this, we can see there are a number of questions to be asked of portfolio managers in terms of their style of management. There is no right answer, but it is important that advisers ensure their clients are comfortable with the approach.
Andy Parsons is head of investment & protection at Defaqto
