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GTFM rejects TAA

Guardian Trust says tactical asset allocation doesn't consistently add value.

Tuesday, May 1st 2001, 6:59AM

by Philip Macalister

Guardian Trust Funds Management has rejected the use of tactical asset allocation (TAA) in its portfolios as it says the process doesn't add value.

Its views are at odds with a recent paper put out by consulting actuary William M Mercer in Australia. Mercer said that in Australia the traditional active balanced fund managers have on average subtracted value through TAA, while specialist TAA managers have added value.

TAA is best described as a strategy of adding value by making periodic short-term adjustments in asset weightings around a fund's long term strategic benchmark.

A manager using TAA seeks to obtain better than benchmark returns by undertaking short-term tilts in the asset mix of a portfolio in response to expected divergences in asset class returns.

Guardian Trust managing director Anthony Quirk says in the past GTFM aimed to add two-thirds of its out performance from stock selection and protection strategies, and one third from tactical asset allocation.

He says that over the three-year period to December 31 GTFM managed to beat the benchmark by 2.3% through its stock selection. However, when it looks at TAA the firm lost value. That is TAA took 0.96% off the returns. Combined, GTFM's value add netted out at 1.37% annually.

"We actually got that part (TAA) of the equation wrong," Quirk says.

He says TAA is subject a subjective process based on human sentiment. He says TAA decisions have usually being made by monthly meetings of an asset allocation committee and the person who bangs on the table hardest wins the arguments.

Also monthly meetings can't keep up with markets which have become more dynamic over recent years.

By ditching TAA GTFM is going for a "mechanical and automated rebalancing process."

Quirk says if a holding moves more than 2.5% away from its strategic asset allocation, then it will be rebalanced.

The decision means that GTFM can play to its strengths in stock selection.

Quirk says back testing shows that if GTFM had embraced this process three years ago then the -0.96% losses through TAA would have been turned into a 0.53% gain.

The "success record (of TAA) is at best mixed here and overseas," he says. "I'm not convinced TAA can add value consistently."

The new regime will provide an "automatic profit taking process". When markets rise quickly the manager will realise its profits every time the asset allocation exceeds its benchmark weighting by 2.5%.

"I would have been a wonderful structure to have last year," he says.

"It refocuses us on sector performance and eliminates TAA weakness."

Earlier story: Adding Value through TAA

You can read Philip's blog here: http://www.goodreturns.co.nz/blog/

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