Tactical Asset Allocation is gaining popularity as an investment strategy. Before we get to Tactical Asset Allocation, let us quickly understand:
What is Asset Allocation?
In school, we have all come across the concept of a Balanced Diet. It is a diet that comprises a variety of foods, each providing unique nutrients, to ensure a person has good health.
Using this analogy, we can understand the concept of asset allocation. It means, having a good mix of asset classes, each providing unique benefits, to ensure your portfolio remains healthy.
A healthy portfolio needs to strike a balance between risk and security, and this is where Asset Allocation comes into play. Broadly, the asset classes are divided into equities, fixed income and cash and cash equivalents. Different asset classes have low correlation. Hence, diversification through Asset Allocation protects your portfolio from downside risk emerging in a single asset class. It also gives you the potential to earn higher returns and enables you to meet your financial goals more efficiently.
There are several types of asset allocation, such as Strategic Asset Allocation, Dynamic Asset Allocation and Tactical Asset Allocation.
In this article, we will focus on Tactical Asset Allocation. Here’s what we will cover:
- Key types of Asset Allocation
- Deep Dive: Tactical Asset Allocation
- Benefits of Tactical Asset Allocation
Key types of Asset Allocation
Strategic Asset Allocation:
It is a long-term portfolio strategy wherein, the target allocation to different asset classes is clearly defined and adhered to. The allocation is determined based on factors such as the expected returns from different asset classes, your investment horizon, risk appetite, returns expectations and goals. It can be rebalanced periodically, but it is largely a static portfolio, similar to the buy-and-hold strategy.
Dynamic Asset Allocation:
In this investment strategy, your asset allocation is continuously shuffled in order to take advantage of prevailing market conditions. It is an active asset allocation strategy that relies on your ability to identify and benefit from emerging opportunities at the right time.
PL’s flagship Portfolio Management Services product, Multi-Asset Dynamic Portfolio, follows this investment strategy. It is India’s first 100% quant-based dynamic multi-asset strategy. It provides exposure to seven different asset classes through passive instruments.
To learn more about this industry leading PMS, click here
Tactical Asset Allocation:
This is a moderately active investment strategy. Here, the asset allocation is shifted to capitalize on emerging market trends or economic conditions. Once the short-term gains are realised, the portfolio can return to its original allocation for long-term results.
For example, PL’s first-of-its-kind, Tactical Alpha Portfolio Strategy (TAPS), aims to invest in companies with potential short-term alpha within tactical themes.
To learn more about this unique PMS offering, click here
Deep Dive: Tactical Asset Allocation
Tactical Asset Allocation enables you to take advantage of short-term trends through temporary deviation, while retaining the long-term objectives of your investment portfolio. In other words, it adopts a more nimble-footed, agile investment strategy.
- Tactical Asset Allocation is not an ad-hoc decision, or a rush to benefit from dips. It is instead a well-researched, methodical approach that helps you take advantage of macroeconomic conditions.
- Usually, the shift in allocation would be in the range of 5% – 10%, or lower. Don’t go overboard, as it may impact the long-term objective.
- Be cognisant of the tax regulations. Short-term gains are taxed differently from long-term gains. So factor that in when undertaking tactical asset allocation.
- Tactical Asset Allocation between different asset classes:
Example: Your Strategic Allocation mandates you to invest 60% in equity, 30% in debt and 10% in cash. However, if you realise that the markets have corrected sharply and are poised for a rebound, then you could temporarily increase your allocation to equities to say 70% and reduce exposure to debt to 20%.
Alternatively, in a rising interest rate scenario, markets could be highly volatile. In this scenario, liquid or ultra-short-term debt funds could be more attractive. So you could increase your allocation to debt to 40% and reduce exposure to equity to 50%.
- Tactical Asset Allocation within an asset class:
Example: Within equities, you have invested 40% in BFSI, 20% in IT and 20% in other sectors. But if the IT sector suddenly becomes highly attractive, then you can increase your allocation to IT stocks.
- Tactical Asset Allocation can also come up within a specific theme, like agri-commodities and defence, or be based on market cap, like a sudden uptrend in small caps. You need to stay updated with changing macroeconomic conditions, business cycles and other relevant factors in order to be able to identify these short-term tactical opportunities.
PL’s in-house PMS, TAPS, believes that being invested in the right theme at the right time is more important than stock selection. It relies on a proprietary Techno-Quant-Fundamental approach to identify tactical investment opportunities.
Click here for more details on TAPS
PL also provides in-depth and timely research to its clients on such emerging investment opportunities. These reports capture opportunities across sectors and asset classes, and can be accessed through your email ID, or by joining PL’s WhatsApp and Telegram channels.
Click here to view the latest reports and analyses by PL
Benefits of Tactical Asset Allocation
Potential of higher returns:
Let’s go back to our analogy of a diet. While a routine balanced diet is good, it is also important to include seasonal fruits and vegetables. Likewise, your strategic allocation needs to be complemented with tactical asset allocation, in order to benefit from emerging opportunities. Capturing the upside in an asset class or sector gives you the potential to earn higher returns.
Move in tandem with times:
Markets and the economy do not move in a linear pattern. A range of factors, including geo-political issues, sectoral trends, competition and domestic demand could have an impact on the performance of a sector or asset class. There may be a period where equities outperform, followed by a period where debt outperforms. With Tactical Asset Allocation, you can shift allocation to ensure your portfolio benefits from these macroeconomic changes.
Tactical Asset Allocation ensures that your portfolio does not remain static. It allows you to make timely shifts to diversify your portfolio, maximize returns and minimize risks.
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