Conference asks if tactical asset allocation adds value
Financial advisers at the annual Morningstar managed funds conference are questioning whether it is appropriate to take a tactical asset allocation position with a portfolio or whether a buy and hold approach is more effective.
Tuesday, February 22nd 2000, 12:00AM
The issue was thrown into sharp relief because the tactical asset allocation made by the conference's "expert panel" a year ago did no better than the strategic allocation.
"After tax it was a dead heat between tactical asset allocation and strategic asset allocation," panel chairman Donal Curtin said.
On a net basis the tactical portfolio would have returned 8.14 per cent in the 12 months to December 31, compared to 8.63 per cent for the benchmark portfolio.
Curtin says the tactical portfolio developed at the start of 1999 did well in the first three-quarters of the year, however it bombed in the last quarter when there was a major rally in international shares.
Curtin says leading up to the end of the year the expert panel decided to take a defensive position as an insurance policy against the much feared, but harmless, Y2K bug.
"In the last quarter we paid quite an expensive insurance premium."
A number of conference delegates questioned the panel about the merits of tactical asset allocation, and the way the panel devised the portfolio, as it only broke even last year, and in the previous year it seriously underperformed the benchmark position.
Curtin says the 1999 portfolio had some good and bad calls, the good being the decision to have no New Zealand fixed interest and the bad being underweight in equities.
He says in the real world the tactical portfolio would be reviewed more often than quarterly as this one is done.
"Tactical asset allocation does add value in the long term," he says.
Fellow panel member David Hudson, who is the investment officer for Merrill Lynch Mercury Asset Management in Australia says that tactical asset allocation, like value management is under some pressure at the moment, as it appears not to be working.
He says various themes and styles have their periods in vogue, and currently these two are out of fashion.
Also, he notes that "tactical asset allocation is always going to be a difficult ask in a bull market."
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