Strategic asset allocation (SAA) defines the long-term average positioning of a portfolio with regard to the different asset types (for example 60% equities + 40% bonds) and sometimes also with regard to the different asset classes (for example 5% of the portfolio can be held in below investment grade bonds). Conversely, tactical asset allocation (TAA) defines the short- or medium-term exposure to the asset types and classes based on the market assessment and the derived return expectations for the different asset classes by the portfolio manager.
With regard to this, the TAA can lead to over- or underweights of regions, countries, sectors, industries, or single issuers compared to their weighting within the respective portfolio benchmark.
In addition, it is noteworthy that the short-term deviations can be quite big since the portfolio manager may use cash as a risk buffer in times of market turmoil. This means he may sell large parts of the portfolio until the market turbulences are over from his point of view. Nowadays, the portfolio manager may use derivatives or other so-called modern portfolio management techniques to generate the respective positioning of the portfolio, as these instruments are more effective and cost efficient than selling and buying single securities.
With regard to the above, it can be concluded that the strategic asset allocation (SAA) defines the long-term positioning of the portfolio and should therefore be used to determine the respective benchmark for the portfolio, while the tactical asset allocation (TAA) is the driver for the short- and medium-term deviations of the actual portfolio holdings compared to its predefined benchmark.
Nevertheless, it is important that the risk-bearing capacity (risk tolerance) of the investor is considered before tactical asset allocation decisions are implemented in the portfolio.
This article is for information purposes only and does not constitute any investment advice.
The views expressed are the views of the author, not necessarily those of Lipper or LSEG.
