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Tactical Investing Looks Increasingly Strategic

By Murray Coleman June 16, 2014

After two market meltdowns in less than 15 years, Gerard Klingman says he’s talking a lot to prospects these days about alternative-investment strategies. The New York-based Raymond James advisor, whose team manages $1.4 billion, is warning clients to stay flexible at the edges of strategic, long-term asset-allocation plans.

“Buy and hold isn’t dead, but there’s certainly room for improvement,” Klingman says. “After all, you don’t want someone to be fully invested in every market bubble, whether it starts in the tech sector or real estate.”

The approach Klingman calls “tactical overlay” within a broader and more dominant long-term asset allocation isn’t new. But it’s grown more popular since global credit markets plummeted in 2008 — and, unusually, it has endured through a 5-year-old bull market that has seen stocks rise nearly 200% in value. Roughly half of the Financial Times’ top 300 independent advisors, a list set for release on June 26, say they use some form of tactical allocation in client investment plans.

Emphasis on “some form.” Last year, about 7% of advisor-directed client assets were in tactical plays, according to Cerulli Associates. A bit less than 50% were devoted to long-term strategies with some sort of tactical overlay. “The industry isn’t making any wholesale tactical bets, but advisors are definitely favoring a combination of the two,” says Cerulli analyst Scott Smith.

Gerard Klingman

Going too tactical has “proved to be a difficult way to add value over time,” says David Berns, head of quantitative research at Athena Capital Advisors in Lincoln, Mass., a firm that manages about $5 billion. “That’s even before certain types of performance drags from things like transaction costs and tax consequences are taken into account.”

Athena tells clients, “we’re not trying to tactically adjust allocations on a short-term basis to capture short-term moves,” according to Berns. Instead, its portfolio managers make shifts of no more than 15% on average when market conditions get extreme, “in order to limit market volatility and avoid substantial drawdowns in our clients’ portfolios.”

He likes to illustrate this point by reminding investors that losing 50%, for example, requires a gain of 100% just to break even. “We feel it’s important to show in real terms how including a tactical strategy can prove useful” when the market is falling, says Berns.

Built-In Flexibility

In today’s more ebullient conditions, clients often press for more tactical changes than advisors feel comfortable making, says Jeff Burrow, chief investment officer at Valley Wealth in Modesto, Calif., which manages $325 million. “On the heels of the ‘tech wreck’ in 2000 to 2003 and 2008’s financial crisis, we’ve seen many of our clients searching for a panacea of sorts,” he says. “They want to see more gains, but they’re less willing to accept big losses.”

In particular, baby boomers who are “concerned about outliving their nest eggs” are eager to discuss “ways to generate more growth in their portfolios,” says Burrow. In response, he’s been increasing his clients’ tactical positions in recent years. Pre–financial crisis, the firm’s advisors might have made as much as a 10% tactical adjustment to strategic-driven allocations, he says. Now, such overlays represent about a quarter of client assets.

But Burrow tries to keep these allocations nimble. “We invest in funds with managers who take a go-anywhere approach,” he says. “That type of built-in flexibility frees us up to consider bigger picture planning issues — we don’t have to spend as much time monitoring every market swing.”