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Tactical Funds Fumbling Their Chance to Shine This Year: Morningstar

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What You Need to Know

  • Conditions should be good for tactical-allocation funds this year after they lagged peers for a decade, Morningstar says.
  • While the environment is right, tactical funds as a group have performed only slightly better than competitors so far this year.
  • Some tactical funds have done well in 2022 but picking the winners in advance is nearly impossible, Rekenthaler suggests.

Tactical-allocation funds, which shift assets based on changing market conditions rather than sticking to long-term positions, should have an opportunity to shine this year but haven’t done so yet as a group, according to Morningstar.

While tactical fund managers can’t prepare for unexpected market shocks, anticipated pressures, like Fed rate hikes, should provide fertile conditions for success, John Rekenthaler, Morningstar’s research vice president, wrote Monday.

This tumultuous market year has brought the “ideal climate” for such funds, which “desperately need a victory,” Rekenthaler said. After outlining their long-term and recent performance, however, he concluded there was no cause to invest in them.

The steady stock and bond returns that investors enjoyed for the decade leading up to 2022 didn’t provide a great environment for tactical funds, he said. “Lacking opportunities to show their steps, while also burdened by their higher costs … the group badly trailed its rivals,” Rekenthaler said. 

Tactical funds also were less likely to survive during that decade, he added.

Year-to-date as of June 30, tactical funds had lost 14.4% on average, just a bit better than strategic funds, hardly enough to overcome the ground lost to competitors over the years, according to Rekenthaler. “In that rate of closing speed, tactical funds will fully regain their lost territory in …  the year 2145. Give or take,” he wrote.

Investors holding the best-performing tactical-allocation funds, though, may do better, he said, noting that “several tactical funds have notched outright profits this year, with several more landing only slightly in the red.”

Picking the best-performing funds in advance may be impossible, however. Rekenthaler looked at past tactical fund performance and found the leaders and laggards didn’t hold their relative places this year on the whole.

“In general, the tactical-allocation funds that had the highest 10-year returns entering 2022 have dropped the furthest. Meanwhile, the erstwhile laggards have led,” he said. “In summary, investors had little, if any, chance of selecting this year’s tactical-fund winners.”

Cheap and simple funds tend to do better than more expensive and ambitious peers, Rekenthaler said. While recent events gave tactical funds a chance to prove the exception, he concluded, “they fumbled the ball. I see no reason to invest in such funds.”

Christine Benz, Morningstar’s director of personal finance, responded to Rekenthaler’s column on Twitter. 

 “Oh my. JR could teach a master class in the art of the elegant takedown. Today’s victim: active asset allocators,” Benz tweeted.

“The broader point,” she added, “is that if an advisor says he/she is ‘tactical,’ run the other way. Rebalancing back to a strategic asset allocation — ‘tactical lite’ — is the way to go.”