Tactical asset allocation: don’t try this at home



Tactical asset allocation funds typically move between asset classes in an attempt to take advantage of short-term changes in market trends. The appeal behind these strategies is obvious: Every now and then, stories emerge of unusually premonitory market calls, such as Elaine Garzarelli’s bearish call before Black Monday in October 1987, George Soros’ successful bet against the British pound in 1992 and John Paulson’s short game bet on the US real estate market in 2006.

Even investors who do not fundamentally change their asset allocations are often tempted to overweight asset classes that look promising and avoid areas that could suffer if certain macroeconomic trends hold true. But while shifting an asset mix to asset classes with better prospects and moving away from those that might fall out of favor sounds good in theory, this strategy is notoriously difficult to implement in practice.

Indeed, the failure of tactical asset allocation funds suggests that investors should not only stay away from funds that follow tactical strategies, but they should also avoid making short-term changes between classes. of assets in their own portfolios.

Hard to love, harder to use

Switching from one asset class to another did not lead to a performance advantage. In fact, tactical asset allocation funds have lagged behind more static asset allocation funds for each tracking period, as shown in the table below. (I used the allocation – 50% to 70% Morningstar Category Equity for comparison, as its risk profile is generally consistent with that of funds in the Tactical Asset Allocation category.) Tactical asset allocation funds have also not kept pace with the simple vanilla fund equilibrium, a subset of the allocation – 50-70% share class that typically invests in a mix. fairly static about 60% stocks and 40% bonds.

In addition, the performance would be even worse if it included the results of funds that were merged or wound up. Tactical asset allocation funds have an unusually high mortality rate: Morningstar’s database includes a total of 203 unique funds in this category (not counting multiple share classes), but 100 of them no longer exist. Funds with weaker performance often disappear quietly, which has the effect of improving the results of surviving funds. And the performance differences can be significant. Including the results of the obsolete funds, the annualized returns for the last 10 years would drop to 5.28%, compared to 6.18% for the only remaining funds. Tactical asset allocation funds also did not achieve better downside protection.

What is behind these catastrophic results? At the risk of oversimplifying things, it’s hard to make predictions, especially about the future (a quote that could be attributed to Yogi Berra, Mark Twain, or Niels Bohr, depending on the source.) A few examples may help to illuminate that. PSI Tactical Growth (FXTAXE) The goal is to achieve long-term returns by avoiding significant market declines and reallocating assets in response to market changes. Over time, his portfolio has shifted from exposure to leveraged stocks to cash positions of up to 74% of assets. But over the past 10 years, its annualized returns have only been 1.25% per year. Management is at least blunt in explaining some of its recent shortcomings: “Looking at how the Fund reacted to the market in 2020, it was easy to see that we were a little late to release in the spring (although we moved everything to cash on March 13, 2020, for most of the drop), and we were a little late to re-enter (re-entered the market on May 19, 2020) when the stimulus / bailout programs were announced.

Likewise, AmericaFirst Monthly Risk-On Risk-Off Fund (ABRFX) rapidly changes its asset allocation in response to market and economic trends. The fund uses eight factors to determine how much to invest in stocks and how much to invest in Treasury bonds. This strategy has resulted in a frantic turnover rate and dramatic fluctuations in the portfolio, with exposure to equities ranging from a minimum of 25% of assets to over 100% of assets over the past 10 years. But this trading activity did not lead to better results: the fund fell behind by more than 7 percentage points per year on a standard balanced portfolio made up of 60% stocks and 40% bonds (rebalanced annually) over the past 10 years.

High costs also weighed on the results of tactical asset allocation funds. On average, funds in this category take annual expense ratios of 1.55% of assets, making it one of the most expensive categories in Morningstar’s database. Since the funds’ expenses come directly from returns, high costs contribute to their disappointing returns.

Low returns and high costs have made tactical asset allocation funds difficult to use effectively in a portfolio. After factoring in the timing of cash inflows and outflows, investor returns (also known as dollar-weighted returns or internal rates of return) were further lower than reported total returns. During the 10-year period ended December 31, 2020, investor returns for the class were more than 2 percentage points below the reported total returns. Investors would have been better off simply buying and holding a medium-term bond fund.

What works in tactical allocation

Admittedly, tactical asset allocation funds have not been a total disaster. A few funds have been able to implement tactical approaches with some success. For example, AQR Multi-Asset (AQRNX) uses a risk parity approach to balance risk between stocks, bonds and inflation sensitive assets and also makes tactical changes based on AQR models for value, momentum, quality, sentiment market and other factors. Leuthold core investment (LCORX) has generated some of the best long-term returns in the category using a flexible approach to asset allocation that combines stocks, bonds, REITs, commodities and money market instruments.

Some target date fund series, such as T. Rowe Price Retirement and BlackRock LifePath Dynamic, have also successfully implemented tactical asset allocation approaches. These funds generally keep tactical leanings within a relatively small range, however limiting the risk inherent in drastic portfolio changes.


Despite a few isolated success stories, the overwhelming body of evidence suggests that tactical asset allocation is detrimental to investors’ bottom lines. Instead, investors are much better served by funds that maintain more stable asset mixes, as well as avoiding the temptation to make shorter-term changes in their own portfolios. More generally, tactical asset allocation funds are another example of why it’s usually a bad sign when fund companies try to liven up a basic concept: strategic asset allocation to allocation. Tactical asset was worse than the original, with rising costs and falling performance.



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