Morningstar wrote a critique yesterday about Tactical Mutual Funds. Here's a Reality Check for Investors Considering Tactical Funds. While they do make some valid points there basic conclusion that people don’t need to add tactical funds to their portfolios leaves the average investor with the same asset allocation advice that got them crushed in 2002 and 2008 and that has made them no money for the past decade. This is not surprising of course as Morningstar’s business model is built off asset allocation and traditional mutual funds that fit neatly into a style box.
They do make some valid points in the article because there are a number of mutual funds and money managers who would call themselves tactical that really are not. Tactical asset allocation quite simply is about being in harmony with major market trends, moving based on verification—not prediction, being willing to go to 100% cash for as long as needed, and avoiding the large long term loss. The tactical mutual fund landscape is filled with funds that try to predict markets and funds that claim to be tactical but are only willing to make minor shifts in allocations. There are also a number of “tactical” funds out there purely because of the marketing sizzle with managers that have no real experience investing tactically. So there is no wonder why most of these types of funds would have unimpressive performance.
At the end of the article the advice moves to outright dangerous:
“Tactical funds maintaining exposure to multiple asset classes such as MFS Global Multi-Asset GLMAX may be more suitable as core holdings.”
“Clearly, the funds that take advantage of the flexibility to invest 0%-100% of assets in any asset class ought to be viewed as opportunistic holdings and kept to a much smaller portion of a portfolio, so they won't skew an investor's overall asset allocation or subject them to outsize losses if that fund's tactical bet goes very wrong.”
This is actually the other way around. Funds that maintain exposure no matter what the market is doing expose investors to outsize losses as they ride the market downwards. The funds that can go from 0-100% at least give investors the opportunity to get out before a bad market turns into a really bad market.
The bottom line is that traditional asset allocation and using the Morningstar rating system to pick funds doesn’t work and hasn’t worked. It also exposes investors to way too much risk. True tactical asset allocation that stays in harmony with major market trends would have protected investors in 2002 and 2008 and is the only way to manage money that works.