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 investment funds 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, they can make enhancements 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 reduce risk and/or to capitalize on short term opportunities. The goal: 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.

For example, Granite portfolio managers have been studying consumer mobility data since the pandemic began and lockdowns forced people to work from home. Public transit use has proven to be a valuable indicator for the portfolio managers, helping them determine whether or not a return to normal is on the horizon.

Signals for an adjustment

Tactical asset enhancements are 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, we can dial down the risk and reduce exposure to equities. If markets look cheap after a selloff, we can add back risk to our portfolios.

Conversely, if markets decline or corrections occur, doors may open to investment opportunities. When Omicron appeared on the radar, the portfolio managers reacted by seeking to protect the portfolios from risks of an extended market in the face of Omicron’s spread.

Towards the end of summer and the beginning of fall, the Granite portfolio managers also reduced its holdings in equities. At the time, valuations appeared streched and the investment team decided to shift the asset mix to a more neutral position. Again, the goal was to protect the portfolios from rising market risks.

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 consists of 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 our portfolios

By using tactical asset shifts, the Granite team’s approach has stood the test of time.

Important information

*For over ten 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.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

This document is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. or any of the sub-advisors to those funds. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

Information contained in this document has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This document may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.

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