TAA back in fashion

Tactical asset allocation (TAA) is coming back into vogue in an environment of higher volatility and lower returns, according to Barclays Capital’s director of funds business, Caroline Saunders.

Speaking at the PortfolioConstruction Conference in Sydney yesterday, Saunders said manager selection was much more in favour in the 90s because most asset classes performed well and the adage ‘time in the market’ rang true.

“Long only investing served people well and TAA provided minimal if any alpha generation,” she said.

However, Saunders asserted that the landscape has changed and in an environment of constrained returns, market volatility and much greater cyclical swings, anything that could improve returns would prove more valuable.

“There is more opportunity for TAA to add value. The 90s ‘buy and hold’ strategy won’t work so well in this environment.”

Saunders said TAA was previously considered too difficult. However, she said increased volatility and more asset classes to choose from provided TAA with greater ability and an expanded scope to add value.

“Investment markets are not efficient and irrational investors can impact markets quite significantly,” she said, asserting that many underestimate risk in portfolios.

“Large daily swings have a significant impact on long-term performance, and investors stumble on Black Swans and large swings more often than they expect.”