Adding value through tactical asset allocation

One way of adding value to an investment portfolio is through the use of tactical asset allocation (TAA), according to research from consultants William M Mercer.

TAA is not widely used in New Zealand and about A$60 billion of money under management in Australia use it TAA as in their portfolios.

However, it is something that may become more common in New Zealand if the Government's new superannuation fund gets off the ground.

"The New Zealand Superannuation Scheme, because of its large expected size, will allow into New Zealand some features of global investment, which previously have been uneconomic to deliver here," Colonial First State Investment Managers chief investment officer Mike Gibbs-Harris says.

He says TAA is one of those things.

TAA is best described as a strategy of adding value by making periodic short-term adjustments in asset weightings around a fund's long term strategic benchmark.

A TAA manager seeks to obtain better than benchmark returns by undertaking short-term tilts in the asset mix of a portfolio in response to expected divergences in asset class returns.

Over the life of an economic cycle a fund's actual asset allocation should average its benchmark.

Mercer says that in Australia the traditional active balanced fund managers have on average subtracted value through TAA, while specialist TAA managers have added value.

The study qualifies its position by saying that the history of specialist TAA managers is short, therefore the results need to be "interpreted with caution", and specialist TAA managers with a Mercer A rating have produced "quite impressive" results, compared to all TAA managers as a group.

Mercer's study says that "early evidence suggests TAA managers...can add value."

The study looked at 30 accounts which used TAA, 21 with overlays and nine invested through TAA trusts.

It concluded that value had been added, although the addition on a risk-adjusted basis was "unspectacular".

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