Tactical Asset Allocation:   Major Asset Classes

After determining the “world” market capitalization & using optimization to identify the most efficient portfolio (highest  expected return/lowest expected risk) , we adjust our model portfolios to respond to cyclical changes in the economy.   We use six factors to determine our cyclical risk over-ride.  We are not trying to time the market, but instead use a set of reliable signals to make modifications to our equity, alternative, income, and cash weightings.    

Market Risk Signals

• This risk-over-ride is an additional lever that helps us to control risk in the portfolios and has produced returns that significantly outperform the market indices.  The table below illustrates how we use these "signals" to modify our inputs and redetermine the most efficient model portfolio

Tactical Asset Allocation: Sub-Asset Classes

Tactical Asset Allocation is designed to enhance the strategic allocation approach, by slightly overweighting sub-asset classes that are expected to outperform, and under-weighting assets that are expected to under-perform.  The goal is to achieve higher returns without significantly adding risk by capitalizing on the behavior of the business cycle, which can be determined by paying close attention to shifting economic indicators.  While the exact peaks and troughs may be impossible to identify, the general economic momentum is much easier to discern, and can be exploited.  Historical data reveals that during economic expansions, small cap growth stocks tend to outperform the safer, large cap value stocks.  Similarly, high-yield debt securities tend to outperform investment grade and government issued bonds when the economy is rebounding.   This strategy should not be confused with market timing, or making large bets on short term market speculation.  Our approach to tactical asset allocation involves making small calculated shifts to sub-asset classes based on long term outlooks and educated interpretations of macro-economic data.  

After these adjustments are made, we make implementations and rebalance the portfolio on a frequent basis as economic and fundamental data change.  The table above illustrates a typical "model growth portfolio"