Analysis of more than 5,500 funds by Danish provider Sparinvest has found that tactical allocation funds underperform strategic funds over time, and urges investors to take care when making tactical selections.
Co-authors Kristian Rung Weeke, head of RFP and Client Intelligence, and Jacob Nordby Christensen, chief sales officer, argue in their note Strategic vs. tactical asset allocation - a performance analysis that based on historical risk/return profiles, "we find that the tremendous growth in tactical funds in recent years does not seem to be justified by higher performance."
Weeke added: "We have conducted this research in response to the notion that that we frequently encounter in the market - that tactical funds are the ‘miracle solution' for all investment scenarios, able to react to almost any kind of market situation with positive performance."
"However, our research reveals that such confidence may be misplaced. Whilst the appeal of tactical funds lies in their flexibility to adapt asset allocation to changing market conditions, there is in fact a high discrepancy between theory and practice. Hence, the concrete results reveal that the longer the period of investment, the better the average performance of strategic allocation funds."
Other downsides to tactical funds, the research suggests, is higher average costs and a bigger relative performance gap between the best and worst performing funds.
"The results are interesting as the evidence suggests that it is probably more important to pick the right manager for tactical funds than for strategic funds," Weeke noted.
For further details of the methodology and funds analysed, visit: https://www.sparinvest.lu/insights/strategic-vs-tactical-asset-allocation.aspx