By tilting a portfolio’s exposure between different asset classes at different times there is value to be earned, in the form of enhanced returns and/or reduced risk, which is the premise behind tactical asset allocation. This active method of portfolio management aims to add to or take from different asset classes within the portfolio depending on valuations and the outlook for a particular asset class at that point in time.
Many investors simply allocate among the asset classes popular at the time in proportions similar to those of other investors. While this usually creates uncontroversial portfolios, it often leads to substantial weightings in whatever the asset class of choice is at a particular point in time. Our approach avoids making allocations based on the fashion of the day.
Our active asset allocation decisions always begin with our five year expected returns framework. We dedicate significant resources to maintaining a wide range of long term expected returns across numerous regions and asset classes, each of which is updated monthly. Our aim is to focus portfolios towards asset classes that are undervalued relative to their long term return potential, where there is a ‘margin of safety’ that reduces the probability of losses. This framework is designed to distinguish, in a consistent and unemotional manner, between a good investment story – such as a strong economic backdrop in the US – and a bad investment opportunity – when all the good news is already discounted in prices and downside risk may be elevated. Macro and micro-economic conditions are constantly monitored, discussed and debated, but the foundation of any asset allocation decision we make is always the valuation. The investment team will adjust asset allocation as return expectations evolve and opportunities arise.