This article presents a framework for determining the contributions of different aspects of the investment management process—asset allocation policy, active asset allocation, and security selection—to the total return of investment portfolios. Data from 82 large pension plans indicate that asset allocation policy, however determined, is the overwhelmingly dominant contributor to total return. Active investment decisions by plan sponsors and managers did little on average to improve performance over the 10-year period December 1977 to December 1987. The performance attribution framework is also extended to account for actual and synthetic cash holdings within asset classes.
