I know many investment managers and they're universally competent, conscientious people. However, it's harder to claim that they add much value to the investment process, as they're hamstrung both by the failings of the intellectual framework that defines portfolio theory, as well as a career structure than offers perverse incentives to hug indices for the sake of job security. The way that most industry professionals look at markets is tantamount to doctors looking at disease without an understanding of pathogens. Much of the orthodoxy underpinning industry asset allocation principles is utterly misconceived. Take portfolio diversification; that derives from the CAPM approach that an asset's expected return premium is proportional to its market sensitivity, or beta. Beta is critical, because it decomposes the ratio of the asset standard deviation to the SD of the market, multiplied by the correlation coefficient between them.

The bedrock of conventional asset allocation for retail investors drilled into to every CFP is that they should seek 'uncorrelated returns' across a spectrum of non-equity assets to obtain superior risk-adjusted returns.If we've learned anything in 2008/9, it's that correlations are far higher than that theory ever assumed. For instance, on a 3 year rolling total return basis to end Q3 2009, US real estate correlated 81% with the S&P, hedge funds 66% (HFRI Composite Index), and private equity 84%. If anything those figures are an understatement, given stale pricing via NAV calculations for non-market traded assets, which would lag the return comparatives. We've seen cross-asset correlations hit 75-85% across equity indices (US and global), commodities and corporate bonds in 2008 on the downside and in 2009 on the upside.