TAA added value in 2009, says S&P

Tactical asset allocation (TAA) has helped fund managers add value over the medium term, according to a Standard & Poor’s latest multi-sector report.

The review, conducted in August 2009, revealed that this was in stark contrast with a review conducted in 2007 that showed that not only did most managers fail to add value through TAA — they also detracted value through the strategy.

The report stated that the TAA strategy attempts to add value over the strategic benchmark in a risk-managed framework calibrated to the investor’s tolerance for risk, and that about half the fund managers participating in the review include TAA as a component of their investment strategy.

The report stated that over 60 per cent of these managers are reviewing their TAA on a weekly basis, “demonstrating that the process has become more fluid in application since the 1980s”.

The report stated that in 2009 the majority of managers implementing TAA were able to demonstrate that they had added value to the fund.

One of the reasons why TAA added value over more recent years was attributed to “the extraordinarily high level of asset volatility and ongoing concerns about the health of credit and property markets”.

“Over this period, managers holding underweight positions in these asset classes were able to add value by taking these active positions,” the report stated.

Standard & Poor’s noted that tactical positions are generally not significant in size, and looked to Russell Investment’s ‘strategic tilting’ methodology as an example.

“This shifts the fund’s asset allocation away from its SAA [strategic asset allocation] only when extreme price movements occur and the manager has a high level of confidence that pricing will revert to historical long-term levels,” the report stated.

“What differentiates this approach from a typical TAA process is that it does not require continual changes to the fund’s asset allocation, thereby reducing the risk that the manager could be eroding headline performance through ongoing tactical positioning.”

Standard & Poor’s stated that this type of asset allocation approach is suitable for investors with a longer investment horizon, because this strategy relies on extreme market pricing dislocations and may take longer to materialise.