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“In different years a different asset is the best-performing one”,this is the idea behind asset allocation.
Although it is psychically appealing to try to predict the “best” asset, proponents of asset allocation consider it risky, because it is difficult to predict which asset will perform best in a given year. |
Proponents of asset allocation say that someone who “jumps” from the one asset to another, according to whim, may easily end up with worse results than any consistent plan. So, mind your business carefully.
A fundamental justification for asset allocation is the notion that different asset classes offer returns that are not perfectly correlated, hence diversification reduces the overall risk in terms of the variability of returns for a given level of expected return.
Therefore having a mixture of asset classes is more likely to meet the investor’s goals.
Tactical Asset Allocation
Tactical Asset Allocation (TAA) means an active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.
Tactical Asset Allocation (TAA) can be viewed as a moderately active strategy since managers return to the portfolio’s original strategic asset mix when desired short-term profits are achieved.
Tactical Asset Allocation (TAA) strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplace.
In current financial crisis, bear markets put a premium on firms that adapt and customize asset allocation.
Ideally, portfolio construction not only reflects client goals, but also the current market outlook.
This would help protect investors from threats that are specific to their investment horizon (i.e., retirement during a period of rising inflation). This requires tactical advice and ongoing customization, which clients fully embrace.
Tactical Asset Allocation and Dynamic Asset Allocation
The term ‘Dynamic Asset Allocation‘ (DAA) can also refer to an investment strategy that seeks to produce high total returns irrespective of the performance of market indices using the tools of Tactical asset allocation/Global tactical asset allocation (TAA/GTAA) around a strategic benchmark.
Indeed, many investment firms and commentators use the terms TAA, Dynamic Asset Allocation (DAA), and GTAA interchangeably.
In the arena of institutional asset management Dynamic Asset Allocation (DAA) mandates tend to have absolute return targets that are not related to market index returns (e.g. USD LIBOR + 500bps), while TAA mandates will tend to have performance targets that reference market indices (e.g. 50% S&P 500/ 50% Lehman Aggregate Bond Index + 200bps).
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