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Researchers are experiencing “massive demand” from financial advisers for tactical asset allocation advice, driven by investors’ flight into cash, according to Zenith director David Wright.
“There’s a lot of pressure on advisers to do something in reaction to what’s happened to their client portfolios,” he said, which, in turn, is driving the demand for TAA.
Speaking at Perennial Partners’ Invest09 conference on Friday, he said he “had a problem with TAA demand from a few perspectives, not least that our research reveals advisers usually detract from portfolio values through TAA”.
“If there is one certainty in these uncertain times, for example, it is that remaining in cash is certainly not going to recover clients’ capital lost in the (equities) market.”
Another problem is that advisers “rarely measure whether they have actually added value to a client portfolio from a TAA”, he said.
“They don’t go back and ask how a portfolio would’ve performed if they had kept the client portfolio rebalanced in line with their initial intentions for the client portfolio.
“As a consequence, I would argue that in most cases advisers who do TAA do not know if they have actually added value to a client portfolio.”
Yet another problem with TAA is that advisers “also rarely re-allocate back into a client portfolio in time to benefit from the immediate upturn in the market”.
“Often when markets rebound they rebound quickly, and if you miss that initial rebound you will miss a large part of the investment return.”
As an example, he said, the first six months after the market recovery in each of the past six bear markets in Australian equities produced an average return of 28 per cent.
A final problem for Wright is that “large moves in TAA are also very risky from a business risk perspective as well as an investment risk”.
“There seems to be a new breed of investment guru out there (among advisers) who amazingly allocated their client portfolio to cash in October 2007.
“I don’t know how many times I’ve been told that, and I think 95 per cent of the people that said that are bullshitting, and the other 5 per cent were very lucky.”
