Russell says no value in tactical asset allocation
TheRussell Investment Grouphas claimed tactical asset allocation (TAA) seldom adds value to diversified portfolios, and investors who time the market and tilt portfolios to favour particular asset classes are only adding risk.
Russell director Stephen Roberts says the risk is a result of narrow focus and limited range of portfolio bets, such as being overweight equities and underweight bonds in anticipation of a return to market equilibrium.
Russell says aTowers PerrinSuperannuation Pooled Funds Survey showed only 10 out of 34 funds added value through TAA in the three years to December 2002.
“Managers who use a bottom up approach, with a broad range of investment decisions such as stock research, portfolio construction and organisational stability, have more opportunities to diversify away forecast errors than those using tactical strategies,” he says.
According to Russell, fund managers making use of TAA need to have an understanding of investments, experience in asset mixing, economic and political analysis and up-to-date interpretations of the impact these areas will have on the stock market.
The survey showed only 10 out of 34 funds added value through TAA for the three years to December 31, 2002, and of these 10, five added less than 0.3 per cent each year through the process.
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