Evaluation Techniques to Uncover Winning Tactical Investment Strategies

Tactical allocation strategies were created to address unmet investor demand. These strategies have evolved over time, implementing different styles and approaches with a common goal of dynamically adjusting allocations to improve investor outcomes. In this case study, we provide background on various considerations for tactical investment strategies and make the argument that investors should focus on understanding whether a particular tactical strategy is positioned for long-term success. We believe the key questions investors must ask are:

1. Is the model designed with your outcome in mind (i.e., upside participation with the potential to avoid losses that take years to recover)?
2. What is the basis for the strategy to make allocation adjustments: does it rely on a manager’s sentiment, models that seek to identify levels of risk, etc.?
3. How sensitive is the allocation model and what is the likelihood it can lead to whipsaw?
4. Is the manager trying to outperform on the upside or simply provide asset class exposure?
5. What is the downside if the models are wrong: missed opportunity cost or substantial losses?