John Rekenthaler: Everyone Wants to Be Tactical at the Wrong Time

Morningstar’s Christine Benz discussed the latest investor fads now being catered to by the mutual fund and ETF industry with John Rekenthaler.

Of all the various categories (alts, multi-asset, etc), John says tactical are perhaps the most-faddish. Although I would say that right around now, after a 20% year-to-date run in the stock market and a few years without a major crisis, is where you’ll see tactical managers be abandoned for more all-in strategies that appear to be “working”.

Here’s John:

Benz: How about tactical asset allocators? That’s another category where we saw a lot of interest several years ago, and then again more recently coming out of the bear market we saw tactical asset allocation getting a lot of interest again. Do you think such funds make sense when you look at their total performance? How have those funds done over time, and do they merit a role in investors’ portfolios?

Rekenthaler: I think these funds clearly have the letters FAD written on their foreheads, more than anything else that we’ve talked about. Frankly, these things just come out exactly at the wrong time, and they disappear. They came out circa 1990 after the 1987 bear market crash. People want to get tactical after they lose money in a crash. They come out and are marketed that you can dodge the next downturn. Of course, there isn’t a downturn for a while because the prices are cheap because you just had a stock crash. It’s the wrong time to be in them. And they were gone by the mid-1990s. This is again a second round. I’ve seen this twice now: the tactical asset-allocation funds that come out in the late ’80s and the tactical asset-allocation funds that came out in 2008. And they tend not to be cheap. They tend to be launched at the wrong time. And when you need them for the next crash, they won’t be around.

This is spot on. It’s very hard to be tactical and diversified across asset classes and still make people happy during a runaway bull market for the S&P. This is especially true when there are no corrections along the way to prove one’s tactical mettle.

Source:

Are These Investment Trends Just Fads?  (Morningstar)

Read Also:

Investment Fads and Themes by Year, 1996-2012  (TRB)