Russell has monitored the performance of New Zealand balanced funds which practice TAA and concluded the process doesn’t work.
The top managers in each period do reasonably well, Russell says. But that out-performance doesn’t last.
“This suggests that added value is as much luck as anything else,” Russell managing director Ed Schuck says.
“TAA simply does not reward investors with worthwhile net returns for the risk taken on.”
Melville Jessup Weaver points out that markets have been volatile over the past year making it hard to pick the right times to enter and exit markets.
Using an extreme case, it says that if an investor had switched totally between the four sectors (cash, NZ fixed interest, NZ share and unhedged overseas shares, and got all the timings right and in the other instance with all the timings wrong, the returns over the year would have been plus 45% compared to minus 13% respectively.
It also says that if an investors wanted to get out of New Zealand shares because the market was at its peak, that investor faces risks knowing when to re-enter the market at the right time.
Russell says another problem in trying to pick good TAA managers is that very few have a long-term track record and the ones which have delivered in the past are not the same each year.
This makes it difficult to pick managers without the benefit of foresight.
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