“We think asset allocation, certainly over the next five to 10 years, begs for a tactical component that is very hard for many investors to deal with because they aren’t structured to think about macro things like equity exposure…” Ah, yes. Now everyone is singing the praises of tactical asset allocation. The quotation above is from a major article in Barron’s over the weekend, which is an interview with Mark Taborsky, the head of asset allocation at PIMCO. (subscription required) If you don’t get Barron’s, at the very least you might want to borrow a friend’s copy and take a look at the interview.
Tactical asset allocation is gaining notice because it is a very useful way to navigate what markets are actually doing, instead of what they should be doing in theory. Taborsky says, “The majority of people who use the modern-portfolio-theory approach — and it has been with us for more than 50 years — recognize that it has many shortcomings. Anyone who has done it more than a year recognizes how far off their estimates of expected returns are by asset class and how far off their expectations of volatilities and correlations are. It is a very elegant approach, but it doesn’t really work that well.” It’s refreshing to hear someone else make these points for a change!
Mr. Taborsky sums up the shortcomings of traditional strategic asset allocation very concisely: ”The traditional approach to asset allocation relies on looking back in history to what asset classes returned. There is a huge reliance on mean reversion. There is a huge reliance on historic volatilities and correlations.” The problem with reliance on historical norms is that when there is a regime change, and the norms change, you are completely at sea. PIMCO believes that we have had a regime change, which they call the “new normal.” If they are correct, strategic asset allocation could have a rough go of it for a while.
Tactical asset allocation seems to be the only logical way to respond systematically to the constantly changing relationships between asset classes. Our Systematic RS Global Macro strategy (in separate account form or in mutual fund form in the Arrow DWA Tactical Fund) is designed to handle the rotation among asset classes for investors. Given the fear that retail investors still harbor, it might be just the thing to consider when moving cash from the sidelines back into the markets.
Click here to visit ArrowFunds.com for a prospectus & disclosures. Click here for disclosures from Dorsey Wright Money Management.
Posted by Mike Moody 
