Today’s Wall Street Journal has an article about how more mutual funds are moving toward market timing and tactical asset allocation. Unfortunately, it used the terms as if they were interchangeable-and in the estimation of most professionals, they are not. In addition, there’s a big difference between making timing moves or allocation changes based on your woo-woo opinion of valuation or market risk, or making changes based on some kind of rules-based or systematic process.
Market-timing, to me, connotes a switching regimen in which an investor chooses to be in or out of a particular asset. Very occasionally these timing models have multiple stages where the investor might be 0% invested, 50% invested, or 100% invested, for example. Almost always, the goal of market timers is risk reduction. The track records for the best timers suggest that they have been able to reduce risk and earn near market returns over time. In big down markets they often perform extremely well and sometimes lag in big up markets. Timers come both from the discretionary and rules-based camps.
Tactical asset allocators generally work with many more asset class options than market timers typically use. In addition, often their portfolios have almost continuous adjustments to allocations. Although a few tactical asset allocators are discretionary, most seem to be rules-based, although the guidelines used vary widely between valuation, technical, or quantitative analysis. Several tactical asset allocation funds have done very well over time, although they too may perform better in some market climates than others.
The article in the Wall Street Journal seemed more concerned with the cash allocation in the various funds it cited, but that probably is only one dimension of the funds. Not only can these funds vary greatly in style, they vary radically in their approach to timing or allocation. The article puts them all under one big tent, but I think it is really incombent upon the investor to carefully examine what underpins the management of each portfolio. Clients are very desirous of a fund that can deliver market-beating returns and eliminate risk, which I think is a lot of the impetus for the public to chase this type of fund after a bad year in the market. Dream on. You can’t make investment risk go away-at most, you can shift its location slightly-so you need to do your homework.
