According to the Investment Policy Checklist for Pension Fund Assets, what is the primary determinant of investment return?

The primary determinant of investment return within the context of managing pension fund assets is asset allocation. This principle asserts that the way in which an investment portfolio is distributed across different asset classes—such as equities, fixed income, and alternative investments—significantly impacts overall portfolio performance.

Asset allocation is crucial because different types of assets respond differently to economic conditions and market cycles. For instance, equities might offer higher potential returns over the long term, but they also come with greater volatility and risk. Conversely, fixed-income securities may provide stability and lower returns. By strategically allocating assets based on factors like risk tolerance, time horizon, and investment objectives, investors can optimize returns while managing risk.

While diversification, credit quality, and security selection are important elements in the investment process, their effectiveness is often contingent upon the broader framework of asset allocation. Diversification helps to mitigate risk within asset classes, credit quality affects the safety of fixed-income investments, and security selection focuses on the individual securities chosen within an asset class. However, without a robust asset allocation strategy that aligns with the overall investment goals, these other aspects may not compensate for a suboptimal mix of asset classes, which is why asset allocation is highlighted as the primary determinant of investment return.