Strategic asset allocation – set and forget or dynamic?

The three-year bear market in global stocks has naturally caused investors to consider how they invest their money.

One issue subject to debate is how to manage the strategic asset allocation (SAA) for investment portfolios. Given SAA is the dominant driver of performance, the rough experience of the past few years has raised the question as to whether it should be set on a fixed (or static) basis over time or whether it should be varied dynamically to reflect clear mis-valuations between asset classes.

Textbook definitions
In a classical textbook definition, strategic asset allocation refers to the long term or benchmark asset allocation to each asset class in an investment portfolio. Tactical asset allocation (TAA) refers to any deviations from this long-term benchmark position. As such, SAA is primarily concerned with the long term return and risk objectives of the investor, while TAA is concerned with adding value to this objective.

Difference of view
The two schools of thought in relation to how SAA should be set are characterised as follows: