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Portfolio > Portfolio Construction

Tactical Investing and Portfolio Construction: Part 2 of a Talk With Jeff Buetow of Innealta Capital

By Mike Henkel

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With tactical investing gaining increasing attention today amid continuing 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.

In Part 1 of our exchange, we defined tactical investing and compared it to other modes of portfolio construction.

Here in Part 2, we explore tactical allocation in a broader context, discussing the future of wealth management and the macro outlook.

Mike Henkel: What is unique about your tactical asset allocation model relative to most others?

Jeff Buetow: We are particularly focused on the element of risk. Many tactical managers are focused on the pursuit of alpha. Our model strives to deliver enhanced return but with equal or less risk than a traditional strategic asset allocation portfolio. We design our portfolios to be conservative in the amount of risk allowed; for instance, we will limit our China exposure to 5% of the allocation despite our bullish long-term outlook for that market and the temptation to load up on China assets. We are always managing risk and return simultaneously.

Mike Henkel: What concerns you most over the coming years as it impacts wealth management and portfolio construction?

Jeff Buetow: The capital markets are going to be volatile for the foreseeable future, making the advisor’s role as educator for their clients more important. We are in an era of unknowns with little precedent. Monetary policy is a prime example. The Federal Reserve’s decision to implement another round of quantitative easing (QE2) reflects lack of confidence in the macroeconomic situation. It also represents its own set of risks if too much liquidity is pumped into the system for too long. Expectations are very high for the Fed to “solve” fundamental economic problems, from unemployment to depressed real estate, neither of which is arguably solvable through monetary policy.

Mike Henkel: Given these fundamental problems, what asset classes do you currently like or dislike, and why?

Jeff Buetow: We’re not bullish equities. The equities markets seem to believe that because bonds are expensive, we should buy stocks. This isn’t the most compelling case, especially since equities prices are based on forward-earnings projections. Where will the 

 

earnings come from given unemployment, global debt issues and depressed housing? What happens when expected earnings don’t manifest themselves?

To the extent that we like some equities, I lean toward consumer staples and dividend payers, such as utility companies. This is the beauty of tactical allocation: taking advantage of asset classes where there might be short-term gains. We also like REITs, gold over the long term and emerging market debt.

Mike Henkel: Overall, how do you see tactical strategies fitting into a portfolio?

Jeff Buetow: There is no one-size-fits-all. Advisors must be careful to look at the individual circumstances of each investor, their current levels of diversification and capital growth needs. For the sake of discussion, let’s say an investor has a “moderate” risk profile and wants exposure to sector and country-rotation strategies, which tactically alter exposures to sectors and countries in response to changing market conditions. I might replace their large-cap equities exposure with the sector rotation, and their international equities exposure with a country-rotation strategy. Now those two pieces of the portfolio have become tactically managed.

The aim is to ultimately make a portfolio less risky, more diversified and tilted toward a conservative positioning. Tactical strategies are part of a larger framework that favors portfolio diversification and helping investors meet their long-term objectives.

Disclaimer: Past performance is not indicative of future results. The opinions expressed herein reflect our judgment or those of a third party 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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