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Tactical allocation is hard. Don’t take my word for it; check
out the returns for the tactical-allocation Morningstar
Category. They lag every other allocation category by a
wide margin. That includes conservative allocation,
where the equity weighting has to be under
50%
; the
moderate-allocation category (
50%
to
70%
); the
aggressive-allocation category (
70%
to
80%
); and the
world-allocation category, where at least
40%
of
assets have to be held overseas. (In the allocation section
in the fund data pages, we tag the funds with the
category abbreviations
TV
,
CA
,
MA
, and
AL
.)
The five-year return on tactical allocation through October
2015
was
3
.
6%
annualized, compared with
5
.
0%
for
conservative allocation,
7
.
8%
for moderate allocation,
8
.
3%
for aggressive allocation, and
4
.
6%
for world
allocation. As I said, it’s a wide margin.
Three of the four tactical-allocation funds in the Morn-
ingstar
500
are in the red for the trailing three years
and one is in the red for the trailing five years. That’s
pretty brutal given how strong returns have been
in U.S. equities and most developed markets over that
time period.
We define tactical allocation as strategies that make
frequent shifts among asset classes and sectors.
These funds often claim they can achieve better returns
by moving to the right markets and asset classes at
the right time. Yet, to look at them, that flexibility has
been more curse than blessing.
I’m not too surprised by the results, but I am surprised at
how few tactical-allocation funds have competitive
returns. Quite a few have been wary of U.S. equities and
underweighted them at a time when they’ve had
strong returns. Some have also made aggressive bets
on emerging markets at a time when they’ve lagged.
That said, it is no surprise that it’s very hard to shift
among asset classes. As Morningstar’s John
Rekenthaler found a few years ago, both individual
investors and institutions alike are better at pick-
ing mutual funds within an asset class than they are
at picking asset classes. Most of the returns gap
highlighted in my annual “Mind the Gap” study comes
from people hopping from bonds to equities, or
domestic stocks to foreign stocks, at the wrong time.
There’s a lesson there for all of us. It’s tempting to move
money from a slow-growing economy to a faster-
growing region. The problem is that the news usually is
already priced in. It’s not so different from growth
stocks and value stocks. Value stocks often need merely
to exceed very low expectations to succeed, while
growth stocks need to live up to ever-higher expectations,
which isn’t easy.
In addition, human nature leads us to want to invest in
the asset class with the best recent returns and to
avoid repeating the mistake of owning the duds. However,
markets tend to humble those of us who think we
can jump around at the right times.
Rather than trying to invest like a master of the universe,
consider a couple of extremely boring but effective
tactics. Automatic rebalancing essentially takes you in the
opposite direction of trend-chasing. Many
401
(k)s
now have this option—you just pick how frequently
you want to rebalance, and since it’s in a tax-shel-
tered account you can do it without tax consequences.
You can also enroll in simple automatic investment
programs that help provide the discipline to stick with
a plan even when markets are scary. Such programs
also are handy ways to boost savings levels, as they get
your money out of your bank account and into a long-
term investment.
K
Moving Between Asset Classes Is
Surprisingly Hard to Do
The Contrarian
|
Russel Kinnel
Our Contrarian Approach
I go against the grain to
find overlooked funds that may
be ready to rally.