Practical Applications of Is Tactical Allocation a Winning Strategy?

Document Type

Article

Publication Date

10-13-2021

School

Finance

Abstract

In Is Tactical Allocation a Winning Strategy?, from the Fall 2021 issue of The Journal of Index Investing, authors Srinidhi Kanuri (of the University of Southern Mississippi), James Malm (of the College of Charleston), and D.K. Malhotra (of Thomas Jefferson University) analyzed the performance of actively managed mutual funds that pursue tactical asset allocation (TAA) strategies. In such a fund, the manager frequently reallocates investments among different asset classes, based on performance predictions. The goals are to improve diversification, protect against short-term losses, and achieve positive alpha.

The authors measured the performance of all tactical allocation funds from January 1994 to October 2016 and compared it to the performance of benchmarks consisting of broad-market indexes and static mixed portfolios that did not reallocate. They found that tactical allocation funds underperformed all the benchmarks and showed negative alpha—meaning that fund managers failed to predict which assets would outperform the market. While TAA funds did have some short-term risk reduction benefits, the authors nevertheless concluded that investors are better off investing in passive funds that follow indexes.

Publication Title

Practical Applications

Volume

9

Issue

2

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