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Tuesday
Mar132012

Observations on tactical asset allocation

We thought we'd share an excerpt from a recent posting from Vanguard regarding the effectiveness of active management, this time with respect to the very fashionable jargon of 'tactical asset allocation'.

Vanguard | 03/08/2012

Tactical allocation mutual funds, which offer portfolio managers the flexibility to shift between asset classes as market conditions change, have proven popular with investors in recent years. But do they deliver?

An article in MorningstarAdvisor looked at the performance of 210 tactical funds to see if they provided a safe harbor during the summer 2011 stock market correction, while also capturing gains during the bull markets that preceded and followed that correction. The goal was to find how many funds provided a better risk-adjusted return than Vanguard Balanced Index Fund.

"Our extended study found scant evidence that these funds delivered on their goal of delivering competitive returns with a smoother ride," according to the article. "Most gained less than the Vanguard fund, were more volatile and prone to downside, or both."

An update to earlier Morningstar research, the report covers only the 17-month period ended December 31, 2011. However, Vanguard has studied similar questions over longer periods and made similar conclusions.

We're not recommending a security here, just providing another datapoint and a suggestion to consider the methodology the next time you're feeling smarter than the market.

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