Due to continuing market volatility, a tactical investment approach has been gaining increasing attention. One of the goals advisors should have is educating their clients on those two different approaches–tactical and strategic. There is no universal solution for all clients and each situation is unique but educating  clients on different investment approaches is essential to help clients to meet their long-term objectives. In this month’s article, we take a closer look at investment products and investment styles that investment advisors used in their clients’ portfolios.

Investment Management: Product

In today’s markets, advisors must spend more of their time staying abreast and protecting clients against volatility. But even as RIA firms have been dealing with near-term market dislocations, other longer-term trends have been continuing to take shape, some of which are helping build and sustain advisors’ businesses.

For several years, advisors have been diversifying away from traditional mutual fund choices (Exhibit 1). In their place, we have seen steady growth in the use of ETFs, alternative style mutual funds and alternative assets. In 2008, we also saw a spike in the use of money market funds, as advisors parked clients’ money in cash–a trend that nearly fully reversed in 2009.

What these trends suggest, especially in light of the shift toward tactical investing, is that advisors are searching for new solutions to address market volatility, risk and cost. ETFs and alternative style mutual funds can offer lower investment cost compared to traditional products, such as equity and bond mutual funds, and private hedge funds, respectively. They may also improve liquidity and flexibility to support a more opportunistic approach to investing.

Investment Management: Style  

Also in 2009, we saw a slight shift from strategic to tactical management of client portfolios, as advisors tried to cope with extreme market volatility and a very uncertain economic climate.

Strategic asset allocation,  long-term capital expectations are integrated with a client’s goals and a target allocation is established. A key assumption is that an investment tends to remain relatively stable over long periods of time. In

Tactical asset allocation, portfolio adjustments are made based on short-term expectations for an asset class. Most “tactical” advisors still create long-term strategic asset allocation targets for clients’ portfolios, but they also make periodic adjustments for the asset mix based on the short-term market environment. In short, tactical asset allocation keeps an eye to the long term but regularly adjusts asset allocation for changing market conditions.


We took a closer look and found that tactical and strategic advisors spend their time very differently. Investment advisors employing strategic asset allocation with passive funds are increasingly concerned about their ability to grow assets (long-term returns for that strategy are now unappealing to new clients) and they are frustrated that those same returns are not meeting their clients’ long-term objectives. Tactical advisors spend the majority of their time on portfolio management (35% vs. 20%) while more strategic advisors spend more time on marketing (15%) and business administration (20%) than their counterparts. This distinction is not surprising given that a more active investment style requires more attention to investments and their day-to-day movements.

Investment Management: Stock Market Outlook

Where to go from here? Looking forward in 2011, most forecasters are optimistic that the U.S. economy will grow at a moderate pace in 2011. Investment professionals agree with that and believe that 2011 will be better than 2010.The Advisor Confidence Index (ACI)—a benchmark that gauges advisor views on the U.S.economy and stock market— showed a similar trend. The index was 116.13 in December, its highest mark in almost four years. The last time advisors were so optimistic was in February 2007. And many advisors, like Rob Siegmann of Cincinnati-based Financial Management Group, are optimistic looking forward.“The economic recovery should extend at least through the 2nd quarter of 2011 and late cycle sectors like energy are poised to do very well” said Siegmann.