Markets go up and markets go down. Portfolio managers sometimes need to rebalance asset mixes. So what is tactical asset allocation?
Each Sun Life Granite Managed Solution has its own foundational mix of asset classes that make up its strategic asset allocation. Even so, there are times when changes in the market create opportunities either to reduce risk or earn potentially higher returns. Temporarily adjusting the strategic allocation to capture these shorter-term opportunities is called tactical asset allocation.
Also, in that process, enhancements can be made tactically by asset class and by management style, whether active or passive. Doing so enables portfolio managers to respond to potential market risks and opportunities as they arise, in an effort to mitigate risk and/or to capitalize on short-term opportunities. The goal is to improve risk-adjusted performance and preserve capital. Tactical enhancements are made gradually and within predetermined guidelines.
The decision-making process
How do the portfolio managers know when an adjustment is needed? The portfolio managers meet every week. They discuss activity in the markets and debate opportunities and possible risks.
They pay special attention to portfolio positioning. They also study indicators to determine the right time to capture opportunities.
Which indicators are important? The state of the economy is certainly one. The job market is another indicator.
Granite portfolio managers also closely monitor monetary policy. These are actions that a region’s central bank can take to help manage economic growth. For example, Canada’s central bank decides on the country’s key interest rate. This has a wide-ranging impact on our overall economy. It dictates consumer interest rates like mortgages and savings, but also valuations of stocks and bonds and most investments.
Signals for an adjustment
Tactical asset enhancements are generally made on a three-to-six-month time horizon. There needs to be a good reason to make an adjustment.
What would signal that a shift is needed? If there’s a strong rally and markets become expensive, Granite portfolio managers can dial down the risk and reduce exposure to equities. If markets look cheap after a selloff, risk can be added back to the portfolios.
Factors that trigger incremental adjustments include:
- Economic indicators;
- Market sentiment;
- Valuation & yield;
- Monetary & fiscal policy.
A distinguishing characteristic
The Multi-Asset Solutions Team has a distinguishing characteristic when it comes to tactical shifts. It’s called the Tactical Completion Fund, which may invest in exchange-traded funds and derivatives. This fund allows the team to execute shorter-term tactical shifts with greater agility and efficiency. It’s meant to complete the tactical exposures within the portfolios.
By using tactical asset shifts, the Granite team’s approach has stood the test of time.
Discover how the Multi-Asset Solutions Team's time-tested investment approach can bring more to your investments with the Sun Life Granite Managed Solutions.
*Over the years, our Multi-Asset Investment Team and sub-advisors have brought an investment-focused attitude to how they manage funds for clients and investors by continually fine tuning their approaches and incorporating new ideas to capture opportunities and minimize risk.
The information provided is not intended to be investment advice. Investors should consult their own professional advisor for specific investment and/or tax advice tailored to their needs when planning to implement an investment strategy to ensure that individual circumstances are considered properly, and action is taken based on the latest available information. Views expressed regarding a particular company, security, industry or market sector are the views of the writer and should not be considered an indication of trading intent of any investment funds managed by SLGI Asset Management Inc. These views are subject to change at any time and are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.