Tactical Asset Allocation Funds Review
This week, we continue our last week’s review on asset allocation funds and focus on tactical and world allocation funds. We did this almost a year ago (see August 31, 2015: Review of Asset Allocation Funds and Portfolios). Not only these well known funds can be useful for some investors, they also serve as references for our model portfolios.
World allocation funds: lack luster performance
The following table lists many well known funds that are monitored on SmartMoneyIQ Managers page. These funds allocate in a go anywhere style and diversify globally.
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||Max. Drawdown|
|Six Core Asset ETFs Tactical Asset Allocation Moderate||8.3%||6.8%||4.5%||4.1%||8.7%||10.3%|
|FPACX (FPA Crescent)||2.3%||-0.4%||4.7%||6.2%||6.7%||31.6%|
|MNBAX (Manning & Napier Pro-Blend Extnd Term S)||6.6%||0.2%||4.3%||5.5%||5.9%||39.6%|
|GBMFX (GMO Benchmark-Free Allocation III)||2.8%||-2.8%||1.2%||3.7%||5.7%||20.1%|
|PASDX (PIMCO All Asset D)||11.8%||2.5%||1.2%||2.6%||4.7%||27.8%|
|PGMAX (PIMCO Global Multi-Asset A)||2.2%||-3.5%||1.8%||-0.0%||N/A|
|WASYX (Ivy Asset Strategy Y)||-2.5%||-11.3%||-1.2%||0.8%||5.8%||35.7%|
|SGIIX (First Eagle Global I)||9.0%||7.0%||5.6%||6.3%||7.6%||37%|
|MALOX (BlackRock Global Allocation Instl)||2.3%||-1.9%||3.1%||3.7%||5.8%||32.8%|
|DMLIX (DoubleLine Multi-Asset Growth I)||4.5%||0.7%||2.9%||2.8%||N/A|
|EAXFX (Wells Fargo Advantage Asset Alloc R)||3.6%||-2.7%||1.1%||2.7%||3.9%||34.4%|
|VFINX (Vanguard 500 Index Investor)||7.6%||5%||10.8%||12.3%||7.9%||55.3%|
For the past 10 years, SGIIX (First Eagle Global I) and FPACX (FPA Crescent) stand out in terms of their annualized returns. The First Eagle fund is known to be adept to utilize gold and gold miner stock investments/allocations to hedge equity market downside. FPA Crescent, under Steven Romick, is a long short fund. The manager short stocks that have weak fundamental to hedge its long investments. In our opinion, both are excellent world allocation funds that have withstood the test of time.
As global stock markets are again in an over extended (from 2009 and counting) bull market right now, we would like to draw readers’ attention to maximum drawdown metric of a fund, which measures the maximum percentage drop from a recent peak to its subsequent trough. Unfortunately, we find that many of the above funds incurred too large drawdown to our liking. Our benchmark tactical allocation portfolio Six Core Asset ETFs Tactical Asset Allocation Moderate has had the lowest maximum drawdown and highest annualized 10 year return. Who said one can not deliver a good reasonable return with acceptable risk? Notice that even today when S&P 500 is at an all time high territory, the portfolio has a better 10 year annual return (8.7%) compared with the 7.9% of S&P 500 VFINX (Vanguard 500 Index Investor). From its start date 12/31/2001, the portfolio had 8.4% annual return, compared with VFINX’s 6.5% total return (dividend reinvested)!
Tactical allocation funds
Since the financial crisis, many tactical allocation funds have been introduced to market. The following table shows how they have performed:
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||2008 Drawdown|
|Six Core Asset ETFs Tactical Asset Allocation Moderate||8.3%||6.8%||4.5%||4.1%||8.7%||10.3%|
|P Momentum Scoring Style ETFs and Treasuries||-0.7%||-8.9%||2.5%||5.5%||8.2%||21.7%|
|GTAA (AdvisorShares Morg Crk Glbl Tacticl ETF)||6.0%||-1.1%||0.8%||-0.6%||N/A|
|GMOM (Cambria Global Momentum ETF)||5.7%||-2.7%||N/A|
|GDAFX (Goldman Sachs Dynamic Allocation A)||3.2%||-2.7%||0.4%||0.7%||N/A|
|DWTFX (Arrow DWA Tactical A)||7.2%||0.3%||5.4%||4.3%||46%|
|BRAVX (Braver Tactical Opportunity N)||9.2%||-2.0%||-0.4%||N/A|
|CLTCX (Catalyst/Lyons Tactical Allocation C)||2.8%||1.0%||7.6%||N/A|
|GHUAX (Good Harbor Tactical Core US A)||5.5%||-0.4%||-6.7%||N/A|
In the above table, the highlighted funds/portfolio only invest in US stocks and bonds. The rest can invest globally.
Unfortunately, other than DWTFX (Arrow DWA Tactical A), all other funds were introduced after the 2008-2009 crisis. We are disappointed by the performance of the majority of them. The two tactical ETFs (GTAA and GMOM) have not performed as well as what their creators intended. Since they are still relatively new, maybe time will tell.
Based on the above data, we also want to point out that it’s incredibly important to stick to a strategy and implement it accordingly. As we stated in July 22, 2013: Tactical Asset Allocation: The Good, The Bad And The Ugly, perhaps the biggest challenge for investors using such an active strategy is that it’s very easy to second guess/’improve or optimize’ and thus overwrite the strategy and go based on your own hunch, or it’s very hard to ‘blindly’ follow the strategy. This even often occurs for professional investors.
One way to alleviate the second guessing/’over’ optimizing problem is to adopt core satellite approach, investing in both strategic and tactical portfolios so that the tactical part does not possess the complete anxiety when it underperforms. The other way is to prepare yourself before adopting a (tactical) approach, fully understand the possibility that such a portfolio can suffer from underperformance for an extended period of time (see June 27, 2016: Secular Cycles For Tactical And Strategic Investment Strategies). Regardless, we suspect that when the current underperformance cycle ends, investors will suddenly ‘discover’ the tactical strategy actually works and the whole cycle starts again.
Q2 earnings so far have been better than expected: based on Factset, with 25% of S&P 500 companies reporting, the blended (actual + expected) earnings is -3.7% vs. expected -5.5% decline at the end of June. Nevertheless, if earnings are indeed to decline -3.7% as expected, it’ll mark the fifth consecutive quarter of year over year earnings decline since 2009. Investors are apparently hoping that after this quarter, earnings will recover again. However, given the current ill structured global economy, it’s very hard to believe that economy will recover strongly before it undergoes some serious adjustment. Since we don’t have a crystal ball, we can only rely on our strategies to navigate through. As always, stay on course.
For more detailed asset trend scores, please refer to 360° Market Overview.
We would like to remind our readers that since the financial crisis in 2008-2009, we have not seen substantial structural change in the U.S., European and emerging market economies. Economies have heavily relied on low interest debts. Capital might be misallocated to unproductive investments and consumption. U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future.
We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.
- July 18, 2016: Strategic Asset Allocation & Lazy Portfolio Review
- July 11, 2016: Asset Trend Review
- June 27, 2016: Secular Cycles For Tactical And Strategic Investment Strategies
- June 20, 2016: A World of Debt
- June 13, 2016: Managed Futures For Portfolio Building
- June 6, 2016: Newsletter Summary
- May 30, 2016: Swensen Portfolio And Permanent Portfolios
- May 23, 2016: AAII Article And Some Web Changes
- May 16, 2016: The PIMCO (Dis)Advantages
- May 9, 2016: Boost Your Dull Summer Investments
- May 2, 2016: Low Cost Index Fund Investing
- April 25, 2016: Tax Free Municipal Bond Funds & Portfolios
- April 18, 2016: Asset Class Trend Review
- April 11, 2016: Construction of Sound And Conservative Portfolios
- March 28, 2016: Total Return Bond ETFs Review
- March 21, 2016: Small And Large Company Stock Performance In Different Economic Expansion Cycles
- March 14, 2016: Are Tactical And Timing Strategies Losing Steam?
- March 7, 2016: Defined Maturity Bond Fund Analysis
- February 29, 2016: Smart Strategic Asset Allocation Rebalance When Market Trend Changes
- February 22, 2016: Be Cash Smart
- February 15, 2016: Bond ETF Portfolios
- February 8, 2016: Newsletter Collection Update
- February 1, 2016: Total Return Bond Fund Portfolios In A Volatile Period
- January 25, 2016: Alternative Portfolios Review
- January 18, 2016: Strategic Asset Allocation: A Cautious Outlook
- January 11, 2016: Review Of Trend Following Tactical Asset Allocation
- January 4, 2016: What Worked And Didn’t In 2015
- December 21, 2015: Distressed Assets
- December 14, 2015: High Yield Bonds And Their Correlation With Stocks
- December 7, 2015: Diversification And Global Allocation
- November 30, 2015: Investors and Speculators Combined
- November 23, 2015: Active Stock Fund Performance Consistency
- November 16, 2015: Permanent, Risk Parity And Alternative Portfolios Review
- November 9, 2015: Broad Base Core Mutual Fund Review
- November 2, 2015: Broad Base Index Core ETFs Review
- October 26, 2015: Total Return Bond Fund Review
- October 19, 2015: Advanced Portfolio Review
- October 12, 2015: What About Commodities?
- October 5, 2015: Core Satellite Portfolios In A 401k Account
- September 28, 2015: Risk Managed Strategic Asset Allocation Portfolios Revisited
- September 21, 2015: Quest For The Best Investment Strategy
- September 14, 2015: Core Satellite Portfolios In Market Turmoil
- September 7, 2015: Market Rout Creates An Opportunity to Reposition Your Portfolios
- August 31, 2015: Review of Asset Allocation Funds and Portfolios
- August 24, 2015: Market Rout And Your Portfolios
- August 17, 2015: ETF or Mutual Fund Based Portfolios
- August 10, 2015: Updated Newsletter Collection
- August 3, 2015: Slippery Asset Trends
- July 27, 2015: Performance Dispersion Among Momentum Based Portfolios
- July 20, 2015: Global Balanced Portfolio Benchmarks
- July 13, 2015: Pain in Tactical Portfolios
- July 6, 2015: Fixed Income Total Return Bond Funds In Strategic Asset Allocation Portfolios
- June 29, 2015: Core ETF Commission Free Portfolios
- June 22, 2015: Secular Asset Trends
- June 15, 2015: Giving Up Bonds?
- June 1, 2015: Summer Blues?
- May 26, 2015: Cash, Bonds and Stocks In A Rising Rate Environment
- May 18, 2015: Portfolio Update
- May 11, 2015: Pain in Fixed Income?
- May 4, 2015: The Balanced Stock and Long Term Treasury Bond Portfolios
- April 27, 2015: Long Term Treasury Bond Behavior
- April 20, 2015: 529 College Savings Plan Rebalance Policy Change
- April 13, 2015: Total Return Bond Funds As Smart Cash
- April 6, 2015: The Low Return Environment
- March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2
- March 23, 2015: Investment Arithmetic for Long Term Investments
- March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios
- March 9, 2015: Newsletter Collection Update
- March 2, 2015: Total Return Bond ETFs
- February 23, 2015: Why Is Global Tactical Asset Allocation Not Popular?
- February 16, 2015: Where Are Permanent Portfolios Going?
- February 9, 2015: How Have Asset Allocation Funds Done?
- February 2, 2015: Risk Management Everywhere
- January 26, 2015: Composite Portfolios Review
- January 19, 2015: Fixed Income Investing Review
- January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns
- January 5, 2015: When Forecast Fails
- December 22, 2014: Long Term Asset Returns: How Long Is Long?
- December 15, 2014: Beaten Down Assets
- December 8, 2014: Implementing Core Asset Portfolios In a Brokerage
- December 1, 2014: Two Key Issues of Investment Strategies
- November 24, 2014: Holiday Readings
- November 17, 2014: Retirement Spending Portfolios Update
- November 10, 2014: Fixed Income Or Cash
- November 3, 2014: Asset Trend Review
- October 27, 2014: Investment Loss, Mistakes And Market Cycles
- October 20, 2014: Strategic Portfolios With Managed Volatility
- October 13, 2014: Embrace Volatility
- October 6, 2014: Tips For 401k Open Enrollment
- September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO?
- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
- August 11, 2014: What To Do In Overvalued Stock Markets
- August 4, 2014: Is This The Peak Or Correction?
- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
- May 12, 2014: How To Handle An Elevated Overvalued Market
- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment
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