Balanced funds are not created equally. The reason for this is simple; no two people really want the same thing. This makes sense. Some investors want active management in terms of picking the right assets because they do not have the time or know-how to pick those stocks for themselves. Other investors know that security picking is not always a winning strategy and as a result want their mutual fund manager to adopt a more of a buy-and-hold strategy and to manage their portfolio in a way that they are never over-exposed to any given asset class at any time.
Strategic Balanced Funds
As the name implies, strategic balanced funds take a strategic approach to managing their assets. In plain English this simply means that investment managers will determine their strategy up front and will stick to it throughout the investment process.
To illustrate how this would typically work, consider a fund manager whose mandate is to achieve long-term, sustainable growth. Based on this mandate and his or her belief that over the long-term certain asset classes will perform in predictable ways, the manager might decide on an asset weighting of 40% Bonds and 60% Stocks. This becomes the fund’s strategy – a 40/60 split with no exceptions.
Of course, within this strategy can be other strategies, such as which types of stocks to own to make up the 60% and what kinds of bonds to make up the remaining 40%. Ultimately, however, the manager will not deviate from this 40/60 split.
That means that the manager’s job will be more about making sure that the assets continue to fit into the strategy. As one asset class or, more probable, as a group of specific assets grow outside of their strategic, designated maximums. With those excess gains, the manager will then have to decide where to invest those gains (likewise, in periods of steep downturns, the manager must decide where to take funds to shore up those deviations as well).
Tactical Balanced Funds
Unlike the strategic format, tactical balanced funds will make tactical purchases throughout the investment period. Assuming the fund manager’s mandate is to exceed market returns by 2%, the tactical asset manager will have to decide which securities to hold and to what degree based on market, economic, political and other indicators he or she may rely upon.
For example, a fund manager who might be nervous about a market correction might reduce the fund’s equity holdings and opt instead to increase the fund’s income holdings. So, instead of sticking to, say, a 40/60 split like the manager in a strategic program wound, the tactical manager might switch from 40/60 to 80/20 (or vice versa) depending, again, on the fund manager’s reading of the indicators he or she follows.
Evidently, a strategic approach appears more conservative in that the asset weighting never deviates. However, in periods of sharp declines, a tactical asset manager is better able to protect the fund assets without seeing further decay. The key to whether a fund manager is successful as a strategic investor is based almost entirely on how well he or she (or his or her team) can pick securities.
–> Where To Invest? Visit the MutualFundSite.org and learn more about investing and investment strategy.
Chris has more than 16 years of experience in the financial services industry. He is currently the Fund Advisor for the MutualFundSite.org, a website dedicated to providing visitors with Investment Management content so they can make better-informed investment decisions.
Incoming search terms:
- diff between strategic and tactical asset allocation using example in india
There are no posts related to Difference Between Tactical and Strategic Asset Allocation.
