Tactical Asset Allocation for U.S. Pension Investors: How Tactical Should the Plan Be?

24 Pages Posted: 27 Jul 2015

See all articles by David A. Louton

David A. Louton

Bryant University - Department of Finance

Joseph McCarthy

Bryant University

Stephen Rush

Bowling Green State University - Department of Finance; Vietnam National University - Ho Chi Minh City (VNU-HCM) - University of Economics and Law

Hakan Saraoglu

Bryant University - Department of Finance

Ognjen Sosa

Fidelity Investments

Date Written: June 1, 2015

Abstract

Following the recession in the early 2000s, U.S. corporate and public defined benefit (DB) plans faced unprecedented uncertainty with respect to their funding requirements going forward. Just as capital market performance started helping plan sponsors improve the health of their DB plans, the financial crisis of 2007-2009 delivered another serious blow. Consequently, plan sponsors turned their focus on improving their risk management practices and determining whether asset managers with proven track records should be given more broadly defined mandates, specifically designed to allow for more effective navigation in more volatile markets. Tactical asset allocation strategies seek to add value by deviating from a plan’s policy mix based on the manager’s view on the attractiveness of various asset classes, regions and sectors within the investment opportunity set. Although tactical asset allocation can add value to a portfolio, manager skill and risk taking are required to achieve reasonable risk adjusted performance. The timing and magnitude of shifts from the policy mix can have a significant impact on the portfolio outcomes. Therefore, it is essential for investors to assess the appropriate role of tactical asset allocation in their portfolio management process and evaluate the risk-return tradeoff of tactical deviations from policy. Our study uses a sample of historical returns from the global financial markets and simulation methodology to investigate the relationship of tactical band size and rebalancing practices to various measures of portfolio performance. The results show that providing investment managers with limited flexibility in making asset allocation decisions may allow DB plans to weather down markets better. For DB plan sponsors who are considering giving managers less constrained mandates, manager skill in adding value through tactical asset allocation decisions should be considered.

Suggested Citation

Louton, David A. and McCarthy, Joseph and Rush, Stephen and Saraoglu, Hakan and Sosa, Ognjen, Tactical Asset Allocation for U.S. Pension Investors: How Tactical Should the Plan Be? (June 1, 2015). Available at SSRN: https://ssrn.com/abstract=2636061 or http://dx.doi.org/10.2139/ssrn.2636061

David A. Louton (Contact Author)

Bryant University - Department of Finance ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States
401-232-6343 (Phone)
401-232-6319 (Fax)

Joseph McCarthy

Bryant University ( email )

1150 Douglas Pike
Smithfield, RI 02917-1284
United States
401-232-6446 (Phone)

Stephen Rush

Bowling Green State University - Department of Finance ( email )

212 Business Administration
Bowling Green, OH 43403
United States

HOME PAGE: http://bgsu.edu

Vietnam National University - Ho Chi Minh City (VNU-HCM) - University of Economics and Law ( email )

Vietnam National University - Ho Chi Minh City
Linh Xuan Ward, Thu Duc
Ho Chi Minh City
Vietnam

HOME PAGE: http://uel.edu.vn

Hakan Saraoglu

Bryant University - Department of Finance ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States

Ognjen Sosa

Fidelity Investments ( email )

United States

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