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By Jeffrey Ptak, CFA | 09-30-2015 03:00 PM

Kinniry: A Double Hurdle for Tactical Asset Allocation

Not only are the probabilities stacked against tactical allocation strategies, but even the successful ones can be hard for investors to stick with, says Vanguard senior investment strategist Fran Kinniry.

Jeffrey Ptak: I'm Jeff Ptak, coming to you from the sixth annual Morningstar ETF Conference here in Chicago.

I'm very pleased to be joined today by Fran Kinniry. He is a senior investment strategist and principal at The Vanguard Group--a thought leader for Vanguard.

Fran, thank you very much for joining us today.

Fran Kinniry: Thanks, Jeff. Appreciate it.

Ptak: Fran, you participated in a panel at the conference entitled, "Can Tactical Asset Allocation Work?" So I'll put that question to you directly: Can it work?

Kinniry: I think, the active management space in general, active can work. Tactical asset allocation can work, but then you get into the idea of probabilities of success. So we do know in zero-sum games and counterparties, mathematically half can outperform, half can underperform pre-costs. And then after-costs, it tends to skew it to where a small minority can work.

So, if you look at the research and the data, 10%, 20%, 25% on any cycle have been successful, but then you have to ask yourself, "Is there persistence?"

Ptak: How can an investor enhance their odds of successfully choosing a dynamic asset allocation strategy? Are there rules of thumb they could follow?

Kinniry: With manager selection in long-only, or in the regular mutual fund space, you really want to understand the philosophy, the people that are involved, and then lastly what are the costs to investing in the strategy? If you really have confidence in the people, the philosophy, and it's at a reasonable cost to overcome the friction, then that would be my criteria.

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