David D’Amico ponders this very question in a recent article in FA Magazine. According to D’Amico, clients are disenchanted with their recent market experience and are after something different, which he believes is a tactical solution:
After the past decade of bubbles, followed by corrections, in technology, commodities, real estate, and most recently banking, investors are questioning the traditional asset-allocation, buy-and-hold approach. It simply has failed to produce consistent returns and diversification has not controlled downside risk…
…The answer lies with tactical investment strategies, which are emerging as a viable option for risk control in a prudently diversified total portfolio.
His conclusion is that clients are now ready to embrace a more tactical element in their portfolio design.
Advisors can consider active, tactical investing as a permanent component of a well-diversified total portfolio by segregating 20-30% of a client’s portfolio to invest in tactical strategies available from Separate Account Managers or through pooled vehicles. Advisors need to do due diligence and seek managers with real long term track records, proven tactical formulas, strong reputations and competitive fees.
I can vouch for this on an anecdotal basis, because we see this more and more in our own money management business. Whereas before something like our Global Macro strategy might be a 10% allocation for a client portfolio, more and more frequently we are seeing large core allocations on the order of 35%. Over the last decade, clients have become much more aware of globalization and alternative asset classes. Some of it is no doubt driven simply by poor returns in the U.S. markets in the last ten years, but I think there is also a strong element of openness to additional asset classes in portfolio construction.
D’Amico thinks that the (increasingly few) holdouts from tactical asset allocation misunderstand its true nature and offers a way to reframe its benefits to clients:
Many advisors have been slow to adapt this tactical investing approach because they have been trained to believe that market timing does not work. To change this mindset, advisors need to view these tactical investment strategies not as market timing but as proactive and systematic buy and sell disciplines made possible due to the major technological advancements over the past 20 years. Active investment strategies that tactically allocate assets to areas of the markets that are trending well (including cash) while avoiding declining areas is a sophisticated quantitative investment solution.
Today, tactical strategies utilizing quantitative computer models are more of a science and less of an art. These are data-driven strategies whereby computer models analyze asset class trends and momentum factors to determine where to invest. In broadly declining markets, these computer models are built to stop losses as soon as a downtrend is confirmed and reinvest in a stable asset class or cash to protect wealth. These are not emotional decisions but rather systematic buy-and-sell disciplines based on a wide array of technical and momentum factors.
The key here, I think, is that most tactical allocation processes available today (like our, for example) are data-driven, unemotional, and systematic. Just removing emotion from the decision-making process has significant benefits; using a systematic model that can be rigorously tested is also very important. Global tactical asset allocation strategies have tremendous appeal to clients right now because traditional strategic asset allocation methods have been quite disappointing, especially during the turmoil of 2008. Clients are ready to move on from sit-and-take-it investing.
Source: Michael Covel
To receive the brochure for our Separately Managed Acccounts, click here. For information about the Arrow DWA Tactical Fund (DWTFX) or Arrow DWA Balanced Fund (DWAFX), click here.
Click here for disclosures. Past performance is no guarantee of future returns.
Posted by Mike Moody 
