Tactically SpeakingSubmitted by Financial Planning Hawaii on March 17th, 2014
(An op-ed piece about an op-ed piece)
The MarketWatch.com op-ed piece found at the link below offers rare and interesting research commentary on tactical allocation mutual funds.
As a financial planner, I am generally acceptant of the concept of including tactical allocation mutual funds in client portfolios. As the article suggests, the issue of whether tactical allocation adds value is still hotly debated in the academic and practitioner communities. Below are my comments as they pertain to the above-referenced article.
1. It is not terribly surprising that venerable index king Vanguard might reach conclusions favorable to its world-view by narrowly focusing on the mean category returns, but this article suggests that a good case can be made for performance persistence among the top funds in the tactical allocation category.
2. Apples to Oranges - It bothers me that Morningstar does not have a separate category for tactical allocation funds. To me, it makes little sense to lump funds with prospectuses that grant their managers broad investment flexibility with funds that maintain relatively constant allocations over time. For instance, FPA Crescent (FPACX) is lumped in the "Moderate Allocation” category with Fidelity Balanced (FBALX). Should Ivy Asset Strategy (IVAEX) and First Eagle Global (SGIIX) referenced in the article really be in the same “World Allocation” category constant allocation funds such as American Funds Capital Income Builder (CAIBX) and Fidelity Global Balanced (FGBLX)?
3. This article does not reference the perceived defensive value of tactical allocation funds. Assuming one accepts the case for performance persistence, a review of the leading tactical funds through the last two major bear markets likely reveals that the leading tactical funds did a much better job of preserving capital than both the benchmark indices and their more rigidly managed category brethren.
4. The S&P 500 Index* averaged -3% per year for the decade ending February 2009. On its home page, tactical allocation behemoth Blackrock Global Allocation (MALOX) boasts that investors who purchased shares in its fund have at least doubled their money over every 10 year holding period, no matter when they bought the fund. Assuming this claim is accurate, the ability to reduce risk during down markets may be used to make a compelling case for the tactical camp.
5. It may be noted that the trailing five year returns for many tactical allocation funds do not seem compelling relative to either index funds or even many actively managed peers. The reason? – I surmise that it is because the 2007-2009 down market returns are now excluded from 5 year returns. Is it possible that tactical funds did not have big performance rebounds in 2009 and 2010, because they did not lose as much value in the first place?
*"The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. Indices are unmanaged, do not incur fees or expense, cannot be invested into directly and individual investor’s results will vary."
For more on this topic, readers may also wish to read the following related pieces:
Disclosures – The opinions expressed are intended purely to foster discussion. They are solely those of J.R. Robinson and are not intended to recommend a particular mutual fund or investment strategy. Anyone considering mutual fund purchases should always read the prospectus and should be mindful that past performance provides no assurance of future return.