Bridge over ocean
1 September 1991 Financial Analysts Journal Volume 47, Issue 5

The Performance of Tactical Asset Allocation

  1. Eric J. Weigel

Tactical asset allocation (TAA) is the practice of altering asset class exposures in accordance with model-based risk-reward expectations. An analysis of 17 U.S. managers who use TAA to rebalance between large-cap stocks, long-term bonds and cash equivalents reveals that the vast majority provided positive timing ability at a statistically significant level. This holds for both managers’ simulated and actual market returns.

The managers’ market-timing skills, however, are inversely related to other investment skills. Managers good at timing broad market aggregates appear to be deficient in other investment activities. Transaction costs may partly explain this phenomenon, but the sheer magnitude of the return-diminishing non-market-timing term is too large to be entirely attributable to transaction costs.

Furthermore, the market-timing performances of the managers varied considerably over time. This tendency will probably persist in the future, as managers update their forecasting systems and capital market conditions change.

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