Let’s evaluate combining asset allocation mandates across secular and cyclical bull and bear markets from January 1990 through September 2010. First let me offer definitions of these various mandates. Buy and Hold or Tactical approach means a mix of equities, fixed income, and cash designed to capture broad market returns with some portfolio manager allocation shifts to take advantage of shorter term opportunities. Unconstrained tactical can remove all limits, in other words based on market conditions the managers could allocate from equities to fixed income to cash. Absolute return and alternative investing is designed as highly active management to target modest returns while reducing volatility.(Keep in mind that alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investors portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.)
Ok, so what you are thinking…how does it work? According to the Zephyr Style report(similar to Morningstar) here are the results:
Asset Allocation Mandate: Relative Return 100%, Return: 6.85%, Volatility: 14.96. Not bad for 100% buy and hold over 20 years!!!
Asset Allocation Mandate: Relative Return 55%, Unconstrained Tactical 35%, Absolute Return 10%, Return: 7.55%, Volatility: 8.75, a reduction in over 40% of volatility and increased return…wow, less risk, better return, think about that…Ed Easterling may be on to something with his Sailing and Rowing concept!!!!
(Zephyr utilized the following for its analysis: 59% Russell 3000, 39% SCI EAFE, 2% Citigroup 3 mo T-Bills, HFRI Fund of Funds, HFRI Equity market neutral index, past performance is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Investing in securities is subject to risk including possible loss of principal. No strategy assures success or guarantees against loss.)