This is a summary of the recent performance of a wide range of excellent Tactical Asset Allocation (TAA) strategies, net of transaction costs. These strategies are sourced from books, academic papers, and other publications. While we don’t (yet) include every published TAA model, these strategies are broadly representative of the TAA space. Learn more about what we do or let AllocateSmartly help you follow these strategies in near real-time.
Tactical Asset Allocation underperformed the 60/40 benchmark in July. TAA entered the month with a fairly balanced asset allocation, and was unable to keep pace with strong returns from US stocks and other risk assets.
As we show in the data dump below, despite that strong showing from US risk assets, TAA has (in aggregate) grown more defensive. That runs counter to what you would normally expect to see from what are mostly trend-following/momentum oriented strategies. Time will tell how prescient that unexpected defensive shift is.
TAA trails the benchmark for the year:
As we’ve been covering throughout the year, TAA did a good job controlling market losses in late-2018 and mid-2019, but in both cases, those losses proved to be short-lived and TAA was positioned too defensively for the subsequent market rebound.
To some degree, this is the price of doing business for trend-following/momentum types of strategies. At some point, TAA’s cautious nature is going to save the portfolio from significant loss (ex. 2000-02 and 2007-08), but in the meantime, that risk adversity makes TAA prone to getting stuck on the sidelines when those losses don’t develop.
With such a large pool of published strategies to draw on (50 and counting), we’re able to draw some broad conclusions about the state of TAA. The following two charts help to show trends in the asset classes that TAA as a whole is allocating to over time.
The first chart shows the average month-end allocation to categories of assets by all of the strategies that we track. For example, “US Equities” may include everything from the S&P 500 to individual stock market sectors. Defensive assets tend to be at the bottom of the chart, and offensive at the top. The data on the far right of the chart reflects where TAA stood as of the end of the most recent month.
The biggest shift in allocation was out of US and international equities (-5% and -3% respectively) and into US Treasuries and non-government bonds (+6% and +4%).
In the second chart below, we’ve combined average TAA allocation into even broader categories: “risk on” (equities, real estate and high yield bonds) versus “risk off” (everything else). We realize that some asset classes don’t fit neatly into these buckets, but it makes for a useful high level view.
Note the uptick in exposure to defensive assets, despite the strong showing from US risk assets.
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