Reliance on Modern Portfolio Theory and its unchanging allocations is causing many advisors to take heat from clients who do not want to ever have another year investing like last year. "There just has to be a better way" is the cry heard in many advisors' offices.

However, changing allocations to the right asset mix at the right time is not easy without some kind of system to filter out the noise and misinformation of the marketplace and help make decisions clear. Advisors trying to manage money without a proven system to follow often get it wrong.

A new study we conducted at Hepburn Capital Management suggests an easy way for advisors to move to a modified buy-and-hold strategy while dipping their toes into the waters of active management so they don't get trounced when all arrows suddenly point south.

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The study compares a fixed 60/40 mix of stocks and bonds to an equity allocation that changes based on professional money managers' stock market exposure as reported in the National Association of Active Investment Managers weekly Survey of Manager Sentiment. The study covered three years, from the inception of the NAAIM survey through September 2009, which conveniently includes six positive quarters and six negative quarters, essentially a complete market cycle.

For the study, each quarter's stock allocation is re-set to the NAAIM manager's average allocation for the previous 13 weeks, and the balance is placed in bonds. The NAAIM allocation adapted itself to market conditions during the study period by moving from a high of 79% equities in Q1 2007 to a low of 12% equities in Q1 2009.

The 60/40 mix was also rebalanced quarterly and the results compared. The data this strategy is applied to are returns from the S&P 500 Index and Barclay's Aggregate Bond ETF (nyse: AGG) as reported by Morningstar.

NAAIM members' widely varying investment styles may cause weekly results to fluctuate widely from the trend, so the 13-week average of the NAAIM Survey results was used to smooth out the data.

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Adaptive rebalancing using the NAAIM Survey equity allocations proved itself to be superior to the fixed-allocation model in every metric measured for the three-year period ending Sept. 30, 2009. Nominal returns increased from a three-year loss of .56% for the 60/40 mix to a 9.06% gain using adaptive rebalancing, an annualized increase of 3.2% per year.

On a risk-adjusted basis, the increase in returns was even more striking since virtually every risk measurement--Sharpe ratio, standard deviation, Ulcer Index and maximum draw down--shows dramatically reduced risk of holding stocks using the NAAIM allocation.

Significantly, the NAAIM allocation was profitable in Q4 of 2008 during the stock market crash associated with the banking crisis. Many investors would have loved positive performance in that market environment.

Advisers don't have to become tactical money managers, learn technical analysis, or add staff to make this change, and it is easily explained to clients.

Data on what active investment managers do within their portfolios is often a closely guarded secret. The weekly NAAIM Survey of Manager Sentiment provides a rare, almost real time look at portfolio managers' decisions, and as such can be a valuable tool for investors. The NAAIM Survey of Manager Sentiment can be seen here.

NAAIM is a trade group of approximately 180 member firms, most of them independent registered investment advisors who collectively manage $16 billion for clients. NAAIM members proved they were worth studying by beginning to reduce equity exposure months before the market top of Oct. 9, 2007 as shown in the chart below.

Between June 11, 2008 and March 11, 2009, NAAIM members averaged only 18.46% exposure to the stock market during a time when the S&P 500 plunged 44%.

The full study is available here.

Will Hepburn is president of Hepburn Capital Management, in Prescott, Ariz.