Pro: tactical asset allocation: a sure-fire investment technique or just a fad?

• Author: Knisley, Ralph L., Jr.
• Position: Includes related article on tactical asset allocation performance comparison

Tactical asset allocation: a sure-fire investment technique or just a fad?

An investment strategy founded in fact

Tactical asset allocation has its share of disbelievers. But when the return it realizes is compared to that of comparable funds or the market's performance, TAA seems to win out. One expert says the evidence in favor of the asset investment strategy is convincing.

Tactical asset allocation was all the rage in 1988. As a result, nearly $40 billion in assets is now under the management of companies that pursue this investment strategy. And there is no end to this growth in sight.

Despite its increasingly widespread use, however, tactical asset allocation has its detractors. So any chief financial officer or treasurer weighing investment strategies in relation to pension or other corporate funds would be wise to understand the criticism, and the praise, being heaped on this strategy.

Strategic asset allocation, a familiar term, involves deciding how to invest one's funds among various asset classes, such as stocks, bonds, cash equivalents, and perhaps other kinds of investment instruments, in light of their long-term outlooks. Tactical asset allocation (TAA), on the other hand, involves making short-term adjustments in the asset mix because one of the asset classes becomes overvalued or undervalued in relation to other classes.

Sponsors and investment managers of institutional portfolios, as well as many individual investors, have come to understand that the decisions they make on how to invest among various asset classes is much more important than choosing individual stocks, bonds, or other securities. After all, the best equity manager in the world will have a difficult time if stocks as a whole behave poorly. And the best bond manager is not apt to do well if interest rates rise and bonds drop in price. In this regard, several studies show that at least 80 percent of the long-term returns of pension funds are due to how they allocate their money among various asset classes.

What, if anything, is wrong with this approach? The detractors of TAA make several charges: * It's just a fad.--Although it's true that TAA has increased markedly in popularity since the stock market crash in October of 1987, it actually has been in use since the early 1970s. It is hardly a new-fangled theory conceived to take advantage of the mistakes investors made prior to the crash. * It won't prove any more effective than portfolio insurance, which wasn't very good...