“Tactical allocation” funds have been attracting assets, but our updated study finds that performance leaves much to be desired.
It was a little over a year ago that we examined the success of “tactical allocation” mutual funds (“Tactical Strategies Miss Their Mark,” October/November 2010 issue). Tactical funds, which have been around for years but enjoyed a burst of popularity after the financial crisis, typically eschew investing in a static mix of investments like a traditional balanced fund would. Instead, they rapidly shift between asset classes, often in following macroeconomic or trend-following strategies.
Proponents argue that tactical allocation can be valuable in bear markets or amid heavy volatility given their flexibility, which helps them to sidestep trouble. However, our earlier research found that these funds generally failed to deliver better risk-adjusted returns, or downside protection, than a traditional balanced index portfolio split 60%/40% between stocks and bonds, respectively.
That said, our study only ran through July 2010. Since then, markets have been choppy and range-bound at times, a climate that one could argue is better suited to tactical funds. (Many such funds fared poorly in the wake of the crisis, when markets rebounded sharply.) In addition, a number of the funds that we examined had launched recently, leaving them with relatively short track records at the time we conducted our earlier study. More prosaically, these funds have continued to attract assets at an impressive clip: Based on Morningstar estimates, the 155 active tactical funds that we track gathered more than $10 billion in net new monies for the year to date through Nov. 30, 2011.
For those reasons, we decided to update our research to incorporate more-recent performance and assess how well these funds have done of late.
Our Peer Group
In our earlier study, we examined 163 tactical funds, including 39 that had previously been liquidated or merged out of existence. As of Dec. 31, 2011, that tally had risen to 210 funds, as fund companies launched a bevy of tactical strategies in the latter half of 2010 and throughout 2011.
To extend our previous findings, we measured each tactical fund’s net annualized return, standard deviation, Sharpe ratio, and maximum drawdown from July 31, 2010, to Dec. 31, 2011. We then compared our findings with the results of Vanguard Balanced Index VBINX, which passively invests its assets in a 60%/40% stock/bond mix. (This extends the results of virtually every fund in our previous study, with the exception of 15 tactical funds that were merged or liquidated away since July 2010.)
We found that very few tactical funds generated better risk-adjusted returns than Vanguard Balanced Index’s over the extended time period we studied.