Sparinvest Insights

Part II

Strategic vs. tactical asset allocation
– Performance during the financial crisis

 December 2018   |    Share this article

Kristian Rung Weeke
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Jacob Nordby Christensen
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Speed read

  • Below we have looked at the performance of tactical and strategic (moderate) allocation funds in the aftermath of the crisis year 2008 until 2017
  • While tactical funds, on average, have shown higher variations in their equity allocations, they do not seem to have supplied superior downside risk protection in these years

This article follows on from the paper: “Strategic vs. tactical asset allocation - a performance analysis”. We continue to look at performance of strategic and tactical allocation funds, applying the same methodology as outlined in the previous paper. In particular, we zoom in on the crisis year 2008, and its aftermath. This is especially interesting because tactical funds have a reputation for doing well in times of recession due to their ability to adjust portfolios to market movements (e.g. go ‘cash’). Thus, we examine the relative performance of the Europe-domiciled tactical allocation funds through the crisis years, compared to strategic allocation funds.


As discussed in the previous paper, the data and categorization of the funds are based on Morningstar Direct. The allocation segmentation follows Morningstar Direct Global Category segmentation, with tactical allocation funds categorised as ‘Flexible Allocation’ funds and Strategic Allocation funds being the ‘Aggressive’, ‘Moderate’ and ‘Cautious’ Allocation funds grouped together. For the sake of clarity, we limit this analysis to the Moderate and Tactical Allocation funds because – as discussed in the previous paper – these are the most alike. Therefore the comparisons shown in this paper are between tactical funds (i.e. Morningstar ‘Flexible’) and moderate strategic funds (i.e. Morningstar Strategic ‘Moderate’). Returns are based on Morningstar Direct’s monthly ‘gross returns’ data (pre-costs) and risk is expressed by standard deviations of these gross returns. Sharpe ratios are used as a measure of excess return over the risk-free rate per unit of risk/volatility. The number of funds included in this analysis decreases when going back as far as 2003 because fewer funds have such long track records. Thus, the data covers 156 moderate funds and 87 tactical funds in 2003, rising to 975 moderate funds and 1,143 tactical funds in 2018. Please see the first paper in the series (link above) for further elaboration on the methodology and data.

Performance throughout the financial crisis

Exhibit 1 shows how the historical average net equity allocations have evolved (A), together with yearly gross returns (B), standard deviations (C), Sharpe ratios (D), and the difference in Sharpe ratios (E) from 2003 to 2017 for the two types of allocation funds, alongside the net returns on MSCI World (price appreciations and dividends). The Sharpe ratios for 2008 have been omitted, as the interpretation of these numbers in 2008 (given the strong negative return that year) does not make sense.

Exhibit 1: Equity allocation, performance & risk on moderate and tactical allocation funds (2003-2017)

Source: Morningstar Direct and Sparinvest calculations. The equity allocations are the average (over the year) net allocations calculated as the long minus short allocations for each fund. The gross return is the calculated annualised return (or Gross Return in Morningstar Direct) expressed in percentage terms and including price gains, returns and dividends – but excluding costs. The standard deviation is the annualised standard deviation (Std.Dev) calculated on the basis of the monthly gross return in percentage terms for the relevant period. The Sharpe ratios are measured on the above-mentioned gross return/standard deviations. The risk-free rate is a one-month euro interest rate. The currency is EUR.

Exhibit 1A shows how the net equity allocations for both categories fell sharply in 2008, in line with the steep fall in equity values generally, followed by a very slow normalisation of equity allocations in the years following the crisis*. Equity allocations in tactical funds fell by relatively more than was the case with strategic (moderate) allocation funds, corresponding to a higher degree of allocation flexibility. In the period after 2008 (when equities rebounded), the tactical funds were also quicker to increase allocation again – to a large degree this would be the inevitable consequence of passively following the market, but to some extend there may also have been an active re-allocation to equities.

One would presume this quicker re-allocation to equities would result in higher returns from tactical funds after 2008. But interestingly exhibit 1B shows that the average gross returns of tactical funds were lower than strategic (moderate) funds in 2008, 2010, 2011 and 2012. Thus it does not seem to be the case that the ‘market timing’ attributes of tactical funds were any better than those of the average strategic (moderate) fund after 2008. Looking at 1C, the risk level did not decrease either. Throughout the entire period, the standard deviation of returns in the strategic (moderate) allocation funds has been consistently lower than for tactical funds. This corresponds to a marginally higher average risk (and equity allocation) in tactical funds.

Furthermore, exhibit 1D shows that the risk-adjusted excess return (Sharpe ratio) closely follows the stock market. But it also shows that strategic (moderate) funds’ Sharpe ratios are predominantly higher than those of tactical funds. This is a natural consequence of the more or less equal gross returns of the funds (Figure 1B), together with the consistently lower standard deviation/risk of the strategic (moderate) funds (Figure 1C).

Figure 1E summarises the difference in the risk-adjusted excess return between the two types of funds by showing that the average Sharpe ratio of strategic (moderate) funds is predominantly higher than the corresponding ratio for tactical funds. What is interesting here is that there does not appear to be a obvious correlation between the orange columns (the difference in the Sharpe ratios) and the grey columns (the stock market represented by MSCI World). The average Sharpe ratio of tactical funds is higher than strategic (moderate) funds in 2003, 2006, 2007 and 2017, while the opposite is true in the other years, i.e. the average Sharpe ratio is higher on strategic (moderate) funds. This does not indicate a clear pattern between the equity market returns (represented by MSCI World) and the difference in the Sharpe ratios (or for that matter, the gross returns of 1B). Neither does it support a claim that the tactical funds perform better in times of recession.

* The average allocation data might be skewed as a consequence of new funds being included each year. This can be illustrated by only looking at the moderate funds with long track records (at least back to 2007). In this case the average equity allocation drops to approx. 42% in 2008 which is higher than for the entire population (approx. 39%) illustrated in 1A).

The information contained in this article is not, and should not be construed as, a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction, or to provide any investment advice or other financial or banking service. The material has been prepared solely as a guide to you and your financial institution. There are always risks involved when investing and it is stressed that past performance or past return cannot be considered a guarantee for future performance or return. Sparinvest does not undertake any responsibility for the advice given and actions taken or not taken in respect of this material. Sparinvest makes reservations for possible typing errors, calculation errors and any other errors in the material.

Also read

Part I - "Strategic vs. tactical asset allocation – a performance analysis"

Part III - "Performance on strategic asset allocation funds – The role of steady allocations"

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