| Global Tactical Asset Allocation 101 |
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| 30/05/2004 | |
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As markets move around, flexibility is a decisive asset for an investor seeking both to boost and stabilise long-term total returns. Philip Ainsworth, Managing Director at First Quadrant Ltd explains that the so-called "Global Tactical Asset Allocation" (GTAA) strategy can be a helpful tool to achieve this double objective since it is designed so as to provide an active response to changes in market environment and economic conditions A GTAA strategy is first based on a benchmark that gives much leeway for deviation for tactical reasons, mainly the optimal allocation in bonds and equities at a point in time, or within these asset classes, which regional allocation is the best one. The main intermediary objective is dual: to overweight undervalued global equity and to underweight overvalued regional markets. "There is a long-term strategic benchmark allocation to various asset classes", says Philip Ainsworth, "but as markets move around in relation to one another, global tactical asset allocation allows the investor to deviate from its benchmark in the short or medium-term in order to benefit from market movements." This operation can be carried out either directly by the investor, or through the asset manager, acting on behalf of the investor. GTAA operations are usually carried out on derivative markets. "It is normally done through the derivative markets, often futures and obviously currency forwards if currency is included because it is too expensive to trade the underlying asset, and it disrupts the portfolio manager of the underlying asset as well", explains Philip Ainsworth. Deviation As a benchmark-based strategy, the liberty that can be taken toward the benchmark as to be determined from the start in a GTAA. "One of the central question when using GTAA is how far from the benchmark is an asset allocator allowed to go. That varies very much from client to client and how much risk this client is willing to take vis-à-vis this benchmark.Some clients only want to deviate a percent or two from any particular asset classes rating within his portfolio,while other braver investors and are quite happy to deviate some distance from the benchmark", says Philip Ainsworth, who points out that the deviation always needs to have as a basis the total benchmark of the client As a strategy, the tactical asset allocation does not need to be made on a global scale. Where the tactical asset allocation is domestic rather than global, the switch will then be made between cash, bonds, and equities within a given country instead of an international arbitrage between those various asset classes. Not all investors perform a GTAA or GTAA-like operations through a specialized firm though. "When an investor only has one portfolio manager, and it is a balanced fund, they do some sort of tactical asset allocation within the brief, although the are probably going to use physical assets deviating from the benchmark in order to try to increase their performance", says Philip Ainsworth. "On the other hand, you get specialist tactical asset allocators who perform the overlay strategy for the client and specialize in this type of work", he continues. As such, a GTAA can be managed as an overlay program or using physical securities. J.L. |
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Articles of the same Serie : 101 |
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Articles of the same Topic : Portfolio management |
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