And almost everybody who has a commercial interest in one or the other technique is going to overstate the merits of his technique and underestimate the merits of the opposing technique. In a world of infinite resources, I'd say do it all. You cannot help but be better off with more information rather than less. But there's a huge disparity in the cost. Composition-based analysis is just a lot more costly.
Every security has to be assigned a sensitivity to the asset class.
It's basically a noise issue. So much impacts the price of a security that it's very hard to tell whether a security is reacting to the growth stocks or the value stocks or something else. However, if you put 20 securities in a portfolio that noise tends to average out and you get a much clearer view of the portfolio's sensitivity to the factors. Returns-based analysis using historic returns clearly is going to take a while to pick up major changes. There's no question about that.