TAA gets a tick from Commonwealth

Colonial First State Investment's parent company the Commonwealth Group has come out in favour of tactical asset allocation (TAA), arguing the process can add value to a portfolio.

However, the view isn't widespread. Guardian Trust Funds Management has just ditched TAA because it wasn't adding value to its portfolios. Also the latest report from consulting actuaries Melville Jessup Weaver (MJW) suggests New Zealand managers may not be great at adding value through asset allocation.

In its report, which will be posted on the Features section on Wednesday afternoon, MJW says Colonial First State added the most value to its portfolio through asset allocation in the year ending March 31. In that period it managed to add 1.3% which was way outside the normal range as the average value add in this area was 0.3%.

MJW say the average value add through asset allocation for the 3 year and 5 year periods was 0.2% and 0% respectively.

The Commonwealth Group says the use of TAA is growing as the funds management industry moves away from balanced fund managers and towards asset class specialists.

It says balanced fund managers once changed asset mixes to fulfil the same goals as a tactical asset allocator, but because of greater use of asset specialists, funds can miss out on value gains as different asset markets rise and fall.

"Globally, there is a strong shift to use of TAA overlays by large funds as TAA gains more acceptance," Tactical Global Management Group investment services senior manager Margaret Walker says. "Smaller funds can use TAA trusts to carry out the same function and to make similar gains."

Commonwealth says the size of the TAA market will depend on how asset consultants and trustees perceive TAA.

"If TAA is seen as an alternative investment, then TAA trusts will dominate. On the other hand, if TAA is seen as a central part of a fund, then TAA overlays will dominate and clients will seek both rebalancing and alpha generating services from their TAA manager(s).

"If the later trend emerges globally, then demand for TAA services will be significant," Commonwealth says.