Asset allocation Issues Strategies vs Tactical

1. Asset Allocation Issues
Strategic VS Tactical
Trading Software and Programming
Acedo  Fabia  Reyes  Sorbito  Vidamo

2. Strategic Asset Allocation
• A strategic asset allocation specifies the proportion of various
asset classes in a portfolio designed to provide an investor with an
appropriate risk/return profile over a longer period of time.
• A strategic asset allocation framework will specify a range of
allocations appropriate for various levels of risk tolerance.
• Calls for setting target allocations that adheres to the "base
policy mix" and then periodically rebalancing the portfolio back to
those targets as investment returns skew the original asset allocation
percentages.
• The concept is akin to a "buy and hold"/"passive" strategy,
rather than an active trading approach. But the allocation may
change overtime as to the needs and constraints of the clients.

3. Tactical Asset Allocation
• Periodic “tilts” to baseline portfolios in response to market
conditions with the object of increasing return and/or reducing risk
• constantly adjusts the asset class mix in the portfolio in an
attempt to take advantage of changing market conditions
• temporary overweighting or underweighting of components of
the strategic asset allocation can help enhance performance over time.
This includes not only overweighting those asset classes or sectors that
may provide better near-term return prospects, but also underweighting
those that appear overvalued or are vulnerable to near-term event risk.

4. Tactical Asset Allocation
• How frequently the investor chooses to adjust the asset class mix in the
portfolio will depend on several factors
– general level of volatility in the capital markets
– the relative size of the equity and fixed-income risk premiums
– changes in the fundamental macroeconomic environment)
• an inherently contrarian method of investing. The investor
adopting this approach will always be buying the asset class that is
currently out of favor—on a relative basis, at least—and selling the
asset class with the highest market value.

5. Strategic Asset Allocation Tactical Asset Allocation
Strategic Tactical
How much market or systematic How much active risk versus the
Main Decision
risk? policy benchmark?
Historically, this has been the Historically, this has been a
Importance
dominant source of risk in most small part in the most
institutional portfolios institutional portfolios
Investing in the benchmark Outperform the benchmark
Implementation
portfolio portfolio
Short-term: several months
(trading ideas)
Time Horizon Long Term
Medium-term: six months to
two-three years (thematic ideas)
Valuation,
Risk and return expectations of cyclical analysis (economic,
Key Drivers
various asset classes earnings)
timing, market sentiment

6. Strategic Asset Allocation Tactical Asset Allocation
Strategic Tactical
Cheap (low fees) and does not Expensive (fees and cost of
Costs
require much skill infrastructure) and skill is critical
Measurement Total return of the benchmark Excess return over benchmark
Equities: Equities :
20% 80% Large Cap 15%-25% 70-90% Large Cap
20% Growth 10%-20% Growth
Cash and cash Cash and cash
20% 15%-25%
Example equivalents equivalents
Fixed Income: Fixed Income:
60% 50% GS 50%-70% 40%-60% GS
50% AAA CB 40%-60% AAA CB
100% Total Portfolio 100% Total Portfolio

7. References
• http://www.seasholes.com/files/UBS_SAA_vers
us_TAA_2009-01.pdf
• http://www.investopedia.com/exam-
guide/series-65/portfolio-
management/strategic-tactical-asset-
allocation.asp
• http://www.investopedia.com/articles/04/0317
04.asp