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Since the great recession, government driven monetary policies have consistently propped up risk assets such as stocks to elevated levels. This helps strategic asset allocation (buy and hold and re-balance) portfolios outperform tactical allocation (dynamically adjusting risk asset exposure) portfolios. This is illustrated by the following performance comparison:

Portfolio/Fund Name1 Week
Return*
YTD
Return**
1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe10Yr AR10Yr Sharpe
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation - Equal Weight Moderate0.0%7.7%13.8%118.7%8.9%76.2%2.6%14.9%8.1%57.5%
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation - Optimal Moderate0.3%9.5%17.3%140.4%10.2%84.6%5.0%28.5%9.7%65.7%
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate0.3%6.3%7.9%132.3%7.8%69.2%7.6%64.5%11.2%93.7%

*: NOT annualized

**YTD: Year to Date

Symbol1 Yr3 Yr5 Yr10 YrInception201220112010200920082007200620052004200320022001
AR(%)P_1949513.88.92.68.16.07.70.612.122.0-24.110.816.99.48.623.5-7.40.6
P_3968017.310.25.09.74.69.51.015.623.0-19.612.615.48.58.923.9-14.4-18.1
P_194897.97.87.611.29.86.31.28.717.30.523.317.810.68.517.83.12.3
SharpeRatio(%)P_19495118.776.214.957.539.8102.14.8113.2131.9-113.678.3156.4118.889.9227.5-62.6-24.0
P_39680140.484.628.565.721.4111.57.4129.4127.1-91.591.8150.099.2105.3220.0-92.5-67.2
P_19489132.369.264.593.785.6104.913.260.0132.4-4.9134.0117.9102.296.5228.237.20.5
DrawDown(%)P_194956.710.536.336.336.35.410.56.814.636.16.010.03.87.57.516.39.7
P_396807.211.933.633.645.06.311.97.816.032.15.96.93.86.07.624.138.7
P_194894.810.511.214.114.14.87.510.55.711.210.014.15.17.64.35.80.0

The above compares the two strategic asset allocation portfolios with a tactical asset allocation portfolio. These portfolio's candidate funds include the following:

LARGE BLENDVTIVanguard Total Stock Market ETF
LARGE GROWTHVUGVanguard Growth ETF
LARGE GROWTHQQQPowerShares QQQ
LARGE VALUEDVYiShares Dow Jones Select Dividend Index
LARGE BLENDVTIVanguard Total Stock Market ETF
LARGE VALUEVTVVanguard Value ETF
LARGE GROWTHVUGVanguard Growth ETF
MID-CAP BLENDVOVanguard Mid Cap ETF
LARGE GROWTHQQQPowerShares QQQ
LARGE VALUEDVYiShares Dow Jones Select Dividend Index
Mid-Cap GrowthVOTVanguard Mid-Cap Growth ETF
LARGE VALUEVTVVanguard Value ETF
MID-CAP VALUEVOEVanguard Mid-Cap Value ETF
MID-CAP BLENDVOVanguard Mid Cap ETF
SMALL BLENDVBVanguard Small Cap ETF
Mid-Cap GrowthVOTVanguard Mid-Cap Growth ETF
Small GrowthVBKVanguard Small Cap Growth ETF
SMALL VALUEVBRVanguard Small Cap Value ETF
MID-CAP VALUEVOEVanguard Mid-Cap Value ETF
Foreign Large BlendEFAiShares MSCI EAFE Index
Foreign Large BlendVEAVanguard Europe Pacific ETF
SMALL BLENDVBVanguard Small Cap ETF
Foreign Large GrowthEFGiShares MSCI EAFE Growth Index
Small GrowthVBKVanguard Small Cap Growth ETF
Foreign Large ValueEFViShares MSCI EAFE Value Index
Foreign Small/Mid ValueSCZiShares MSCI EAFE Small Cap Index
SMALL VALUEVBRVanguard Small Cap Value ETF
DIVERSIFIED EMERGING MKTSVWOVanguard Emerging Markets Stock ETF
Foreign Large BlendEFAiShares MSCI EAFE Index
REAL ESTATEVNQVanguard REIT Index ETF
Foreign Large BlendVEAVanguard Europe Pacific ETF
Global Real EstateVNQIVanguard Global ex-US Real Estate ETF
COMMODITIES BROAD BASKETDBCPowerShares DB Commodity Idx Trking Fund
Foreign Large GrowthEFGiShares MSCI EAFE Growth Index
Commodities Precious MetalsIAUiShares Gold Trust
Foreign Large ValueEFViShares MSCI EAFE Value Index
SHORT GOVERNMENTSHYiShares Barclays 1-3 Year Treasury Bond
Foreign Small/Mid ValueSCZiShares MSCI EAFE Small Cap Index
LONG GOVERNMENTIEFiShares Barclays 7-10 Year Treasury
DIVERSIFIED EMERGING MKTSVWOVanguard Emerging Markets Stock ETF
Intermediate GovernmentIEIiShares Barclays 3-7 Year Treasury Bond
REAL ESTATEVNQVanguard REIT Index ETF
Intermediate-Term BondBNDVanguard Total Bond Market ETF
Long-Term BondLQDiShares iBoxx $ Invest Grade Corp Bond
Global Real EstateVNQIVanguard Global ex-US Real Estate ETF
Short-Term BondCSJiShares Barclays 1-3 Year Credit Bond
COMMODITIES BROAD BASKETDBCPowerShares DB Commodity Idx Trking Fund
Intermediate-Term BondCIUiShares Barclays Intermediate Credit Bd
Commodities Precious MetalsIAUiShares Gold Trust
High Yield BondHYGiShares iBoxx $ High Yield Corporate Bd
SHORT GOVERNMENTSHYiShares Barclays 1-3 Year Treasury Bond
Inflation-Protected BondTIPiShares Barclays TIPS Bond
LONG GOVERNMENTIEFiShares Barclays 7-10 Year Treasury
WORLD BONDWIPSPDR DB Intl Govt Infl-Protected Bond
Intermediate-Term BondVMBSVanguard Mortgage-Backed Sec Idx ETF
Intermediate GovernmentIEIiShares Barclays 3-7 Year Treasury Bond
WORLD BONDBWXSPDR Lehman Intl Treasury Bond
Intermediate-Term BondBNDVanguard Total Bond Market ETF
Emerging Markets BondEMBiShares JPMorgan USD Emerg Markets Bond
Long-Term BondLQDiShares iBoxx $ Invest Grade Corp Bond
Short-Term BondCSJiShares Barclays 1-3 Year Credit Bond
ROOTCASHCASH
Intermediate-Term BondCIUiShares Barclays Intermediate Credit Bd
High Yield BondHYGiShares iBoxx $ High Yield Corporate Bd
DIVERSIFIED EMERGING MKTSDEMWisdomTree Emerging Markets Equity Inc
Inflation-Protected BondSTPZPIMCO 1-5 Year US TIPS Index ETF
Inflation-Protected BondTIPiShares Barclays TIPS Bond
Inflation-Protected BondLTPZPIMCO 15+ Year US TIPS Index ETF
WORLD BONDWIPSPDR DB Intl Govt Infl-Protected Bond
Short-Term BondVCSHVanguard Short-Term Corp Bd Idx ETF
Intermediate-Term BondVMBSVanguard Mortgage-Backed Sec Idx ETF
WORLD BONDBWXSPDR Lehman Intl Treasury Bond
Short-Term BondBSVVanguard Short-Term Bond ETF
Emerging Markets BondEMBiShares JPMorgan USD Emerg Markets Bond
LARGE BLENDVIGVanguard Dividend Appreciation ETF
ROOTCASHCASH
LARGE VALUEVYMVanguard High Dividend Yield Indx ETF
DIVERSIFIED EMERGING MKTSDEMWisdomTree Emerging Markets Equity Inc
Inflation-Protected BondSTPZPIMCO 1-5 Year US TIPS Index ETF
Inflation-Protected BondLTPZPIMCO 15+ Year US TIPS Index ETF
Short-Term BondVCSHVanguard Short-Term Corp Bd Idx ETF
LARGE VALUEFVDFirst Trust Value Line Dividend Index
Short-Term BondBSVVanguard Short-Term Bond ETF
Intermediate-Term BondBONDPIMCO Total Return ETF
LARGE BLENDVIGVanguard Dividend Appreciation ETF
LARGE VALUEVYMVanguard High Dividend Yield Indx ETF
LARGE VALUEFVDFirst Trust Value Line Dividend Index
Intermediate-Term BondBONDPIMCO Total Return ETF

This is not an isolated case. In fact, the following shows the performance comparison chart between Cambria Global Tactical (NYSEARCA:GTAA), DWA Tactical (DWTFX) and Vanguard 60% stocks/40% bond balance index fund VBINX:

Symbol1 Yr3 Yr2012201120102009
GTAA4.1NA4.9-7.32NA
DWTFX7.16.85.5-712.523.6
SPY34.314.316.91.914.626.4
VBINX21.611.110.93.613.120.1

In 2009, 2010 and 2012, the buy and hold portfolios have done better than actively managed tactical portfolios while in 2011, the tactical also lagged the US stock and bond balance fund such as VBINX.

So should one write off the tactical strategies again? Should investors become complacent and satisfied with strategic asset allocation? Well, it depends. If you look at more closely how the two types of allocation strategies behaved in the past, you will find that both strategies complemented with each other at different times.

First, if you look at longer term performance, tactical portfolios did perform better, especially in 2008 and 2001-2002. This is not surprising as tactical allocation tries to step through a bear market more carefully.

Secondly, the tactical portfolio usually lags in early bull markets (or in the phase of strong recovery out of bear market low). It then gradually catches up and eventually outperforms in the late stage of the bull market. For example, the tactical portfolio here did better than the two strategic portfolios from 2001 to 2002. It then lagged behind from 2003 to 2004. It caught up and outperformed again in 2005 to 2007 and then it did better again in 2008 (the bear market). It then underperformed again from 2009 to present.

The intuition behind this behavior is clear: in the initial phase of a bull market, the buy and hold equity portions in a portfolio contributes significantly to the upside, while in a tactical portfolio it slowly adjusted its risk asset exposure. In the middle of a bull market, secular trends are forming with trial and error attempts, and this results in the tactical portfolio's underperformance also. In the late bull market, all trends are set up and the tactical portfolio will ride on the strongest asset trends, which results in stronger performance. Finally, in a bear market, tactical portfolios reduced risk asset exposure, resulting in less loss.

From the above discussion, it is clear that strategic and tactical asset allocations should be complemented with each other. It is not an "all or nothing" or "either you or me" binary choice. This is consistent with our previous position in core satellite portfolios.

Source: What Does Recent Strategic Asset Allocation's Outperformance Over Tactical Tell You?