Hortz: Are there major misconceptions about tactical asset allocations that need to be addressed? Can you address these issues and put them into a proper perspective?
Mueller: We believe it is far too easy to dismiss all tactical asset allocators as market timers. Admittedly, within this space, there are a number of managers who have failed to add value and they do not tend to survive long. Often, these approaches have a simple discipline with binary decision-making.
From the inception of our strategy, we have incorporated a blend of quantitative, technical, and fundamental disciplines with the belief that, taken together, they are more effective over time than individually. We are never all in or all out of the market. We use a 30% to 70% equity band, so our tactical calls are where to be within that band, and what sub asset classes are best positioned to gain that exposure at any point in time. We are not trying to make all-or-nothing decisions. In fact, a feature of our process is lower volatility in returns, not extreme outcomes.
Hortz: Having been an early pioneer in tactical asset allocation, have there been changes and an evolution in how the strategy has been developing over time? What differentiators have you developed in your tactical strategies?
Mueller: As mentioned earlier, our Major Trend Index was created back in the 1970s, but this weekly model employs multiple factors, some of which have changed or gone away over time. For instance, reported data from the government has changed over the past 50 years, so we must adapt.
We continually strive to improve the performance of our sub-strategies. We have made enhancements to Select Industries and AdvantHedge over the years, but the DNA of the mandates has remained the same. Our focus on industry groups, while remaining market cap and style agnostic, is a clear differentiator.
Our short approach is another clear differentiator; our hedging strategy for taking off risk. While other TAA strategies hedge, many tend to utilize futures, options, or indexes.
Hortz: Why did you decide to create both mutual funds and ETF vehicles for your investment strategies?
Mueller: Our Core strategy was created in 1987. At that time, we only offered Core as a separate account for institutions and HNW individuals. Driven by demand from independent Registered Investment Advisors, we created a no-load, no 12b-1 mutual fund in 1995.
The RIA universe has evolved substantially in the past 20 years and today many prefer the tax efficiency and often lower costs associated with the ETF structure. We have been encouraged to create an ETF version of Core for many years, but we wanted to make sure we were confident in our ability to replicate the general exposures of the mutual fund without sacrificing performance. Once we were able to get comfortable with our ability to effectively manage an ETF, we launched the vehicle in early January of 2020.
Hortz: How do you recommend that advisors can employ tactical asset allocation in their clients’ portfolios? How can it be used to address today’s market environment?
Mueller: Advisors use our tactical asset allocation strategy in a few different ways. Most often, we are used in an alternative bucket, either as a defensive equity or hedged equity allocation. We offer diversification within the portfolio with longer-term equity-like returns and much lower volatility.
We are also used as a swing manager within a more strategically balanced 60/40 portfolio. We sit between the fixed income and equity managers and will adjust the exposures on the margin, so the advisor does not need to make changes. The environment we are in today is an ideal scenario for this type of application. Maintaining a 40% allocation to fixed income is likely to continue to be a headwind for the foreseeable future. If you can reduce that exposure, without taking an allocation away from your favorite bond manager, it should ultimately help performance.
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