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Tactical Funds Miss Their Chance

“Tactical allocation” funds have been attracting assets, but our updated study finds that performance leaves much to be desired.

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It was a little over a year ago that we examined the success of “tactical allocation” mutual funds. 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.

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Jeffrey Ptak does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.