Tactical asset allocation vs strategic asset allocation

Strategic asset allocation (SAA) is a traditional portfolio strategy that creates an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon and involves periodically rebalancing a portfolio in order to maintain a long term goal for asset allocation.

The most significant component of the investment return (the driver of a client’s long term investment goals) is determined by the strategic benchmark adopted by the investor. This SAA is designed with the aim to give the investor the highest possible returns within their risk tolerance over the long term. Consequently, advisers spend a lot of time aligning the investors’ risk tolerance and investment objectives with the SAA.

By contrast, tactical asset allocation (TAA) is where an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains. The goal of TAA is to generate added performance to a portfolio that is not highly correlated with traditional asset classes and hence improve the overall portfolio performance while keeping within the investor’s risk tolerance levels.

A professionally managed active asset allocation strategy - such as the BlackRock Asset Allocation Alpha investment option - can offer the potential for high absolute returns. The BlackRock Asset Allocation Alpha investment option employs a divers range of global TAA strategies and targets a return of 12 percentage points above the UBS Australia Bank Bill Index over rolling 3 year periods, gross of fees.

Using TAA in a client’s portfolio

Generally TAA is considered as a separate asset class within the client’s SAA and thus its expected risk/return profile should be considered as part of the overall portfolio risk budget.

The BlackRock Asset Allocation Alpha investment option targets a risk profile similar to that of equities with an expected lower correlation with traditional asset classes. It can therefore be utilised as a carve out from the traditional asset classes or as a pure overlay funded from the cash component of the option.

By embracing an efficient TAA approach, advisers can potentially achieve enhanced returns for their clients by combining their SAA with a professionally managed TAA fund.

Find out more about using tactical asset allocation

Find out more about the BlackRock Asset Allocation Alpha Fund