Can You Use Tactical Asset Allocation With Your Mutual Funds Portfolio?
Generally speaking there are two school of investment management techniques. One is Tactical and the other is Strategic. The latter involves picking and sticking to a particularly asset allocation model from day one, based largely on risk tolerance, maximum time and investment objectives. In other words, if you have 20 years to invest, you have a moderately aggressive risk profile and your objectives are largely income, then you might have an asset allocation consisting of 50% Income, 40% Growth and 10% Cash Mutual Funds. As one asset class grows or shrinks based on market fluctuations, you will then shave the larger asset classes to add to your deficient classes. This brings the portfolio back in line with your strategic asset allocation model.
With Tactical Asset Allocation, the objective is a little different. You will need to determine whether you are growth or value oriented. In other words, do you want to discover the next-best opportunity in the market by shifting from defensive, growth-oriented mutual funds to more speculative, sector-specific small cap funds because the belief and research suggests doing so is a slam-dunk decision? Of course, with mutual funds, where the tactical component is ideally taken from the investor’s shoulders and the burden placed on the fund manager, it becomes much more difficult to adopt a tactical approach to investment management.
It is not impossible, however. Most mutual funds are examined for their management style. Morningstar will provide a cute little grid that shows the fund’s investment management style as either Large, Medium or Small Cap with either a Growth or Value approach or a Blend of both. Therefore, deciding on the underlying securities (tactical investment decision) is a task that the fund’s management team can undertake while you, the investor, can decide on the actual tactical asset allocation.
In other words, you do not need to know to buy Johnson and Johnson and McDonald’s during periods of economic stress; you simply need ot know to invest Growth-oriented, Large- to Mid-cap mutual funds where the specific investment directions will be made.
Of course, most balanced funds illustrated exactly how tactical asset allocation works where a fund manager makes all of the tactical decisions, everything from where to invest (i.e. asset class right on down to industry and sector), to how to invest (i.e. what specific securities to purchase) and when to invest (i.e. based on yield curve analysis, P/E analysis and other key research). For the individual investor who relies on a portfolio of mutual funds, the term tactical asset allocation means something entirely different. It means choosing the different funds for their management style and incorporating those funds successfully in his or her portfolio.
Complicated? Indeed it is.
Time consuming? You better believe it. Not only are you monitoring your funds, the changes in investment management of those funds, the fundamental changes to those funds and so on, but you need to know where to invest once key changes are made within those funds. It’s not really fun unless you enjoy that kind of research and can dedicate the time to it.
So for most mutual fund portfolios, tactical asset allocation is normally left to the Balanced Funds. For portfolios of funds, a strategic approach is more common, simple and recommended.
