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Tactical Investing and Portfolio Construction: A Talk With Jeff Buetow of Innealta Capital

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With tactical investing gaining increasing attention today amid continuining market volatility, I recently sat down with Jeff Buetow, founder of Innealta Capital, to gain his thoughts on tactical investing as it relates to today’s advisors. Innealta is an asset manager specializing in the active management of portfolios of ETFs and serves as a sub-advisor on the PMC Tactical ETF Portfolio Series.

Below is Part 1 of our exchange, in which we attempt to define tactical investing and compare it with other modes of portfolio construction.

Mike Henkel: What differentiates tactical asset allocation from other methods of asset allocation?

Jeff Buetow:  On some level, tactical approaches aren’t that different from other methods. If you’re an advisor who attempts to rebalance client portfolios, in a smart way, as client circumstances or market dynamics shift, you are employing a somewhat tactical approach. In general, a tactical manager would make more frequent allocation shifts to respond to short-term market dynamics than a non-tactical manager.

Mike Henkel: How is tactical allocation similar to other methods of asset allocation?

Jeff Buetow:  Within the context of smart investing, which I define as adhering to the concept of a well-diversified portfolio, both tactical and traditional strategic allocation ultimately have the same overall investment objective. That objective is balancing portfolio risk in a smart way, while simultaneously managing an investor’s growth and preservation needs. Tactical and strategic allocations are attempts at meeting the investment objectives of long-term investors.

Mike Henkel: Yet tactical investing has a reputation for not focusing on the long term . Why?

Jeff Buetow: Product failure. Some “tactical” approaches abandon the concept of diversification. It’s critical that advisors understand precisely what type of tactical approach a given manager practices, and what the inherent risks of their approach are.  I’d also add that it’s increasingly difficult to fully separate active (tactical) investing from passive investing. To build an index, for instance, requires active and subjective decision-making, yet conventional wisdom holds that index investing is always passive.

Mike Henkel: How would you define tactical investing then?

Jeff Buetow:  Tactical investing is about managing both risk and return. Good tactical managers take the risk piece very seriously, and prioritize having a well-diversified portfolio. The misconception is that tactical approaches are only aimed at chasing performance. To the extent that some tactical approaches do chase performance, I’d say again that is more due to product failure than a reflection of the tactical approach as a school of thought.

Disclaimer:  Past performance is not indicative of future results. The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Information obtained from third party resources are believed to be reliable but not guaranteed.


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