By definition, tactical investing means actively managing a portfolio with the goal of improving that portfolio’s risk-reward characteristics.
That being said, tactical investing with all of its various investment styles and techniques can sometimes be difficult to understand.
Questions Chris Sumner often gets from clients include:
Most tactical managers are systematic in their approach and their portfolio’s performance is a reflection of that system. However, the broader investment man-date and portfolio construction which guides the manager and the manager’s system, is more often than not a key driver behind the portfolio’s risk/return profile.
To many institutional managers, being tactical means shifting a portion of the portfolio from healthcare stocks to consumer staples stocks. In other words, the manager’s strict mandate requires the portfolio to remain entirely invested in equities, so there is no consideration for tactically moving to bonds or cash. We refer to this style of investing as “Core” tactical where the portfolio stays true to its asset class (equities for example) and the manager attempts to achieve superior risk-adjusted returns by tactically shifting within that asset class.
For RS Financial Group, the benefit of using core tactical strategies is that we always know the portion of the portfolio allocated to core tactical will be invested entirely in equities or entirely in fixed income, enabling us to allocate a minimum percentage of our client’s account to that asset class. Because of their strict mandate, core tactical strategies generally have a higher correlation to the market when compared to other types of tactical strategies.
When a tactical strategy dramatically shifts from equities to cash or bonds, whether in a single-step or multi-step process, we consider that strategy to be a “Satellite” tactical strategy.
For advisors, the benefit of using satellite tactical strategies is that the manager can change your client’s portfolio from risk-on to risk-off, or vice versa, in a short period of time. Because of their broader mandate, satellite tactical strategies generally have a low correlation to the market and can quickly change the portfolio’s risk/reward profile raising or reducing exposure to risky assets.
When a tactical strategy utilizes non-traditional as-sets such as inverse funds or options as a means of obtaining their objective, we refer to that as “Alternative” tactical. The manager of an alternative tactical strategy may use these non- traditional assets by themselves to create a tactical short strategy, for example, or may use these non-traditional assets in combination with equities to create a long/short or hedged portfolio.
For RS Financial Group, the benefit of using alternative tactical strategies is adding real diversification to our client’s portfolio. Most alternative tactical strategies have little correlation or a negative correlation to the market so these strategies can really help to dampen portfolio volatility.
Within these three broad categories, tactical managers use a variety of techniques including, but not limited to, trend following, mean reversion, rotation, and seasonality to achieve their portfolio’s objective. The manager’s style is another key driver behind the portfolio’s risk/return profile.
Let’s take a quick look at each style to better understand what the manager is doing.
While portfolio construction and management style are critical factors in determining the behavior of your tactical portfolio, there are other factors that impact that behavior as well.