Understanding and Implementing Tactical Investments


We’ve all heard the story of upside participation with downside protection. There isn’t a client that does not love the message of giving up a little bit of their upside performance to avoid losses. We can all understand the math of compounding returns and what positive returns it takes to recover from substantial losses. Since 2008, a myriad of tactical managers have entered the investment product marketplace in hopes of capitalizing on retail investors’ waning confidence in the “Buy and Hold” approach. Each offers a unique approach to asset allocation, security selection, or portfolio hedging. Most strategies are built using historical backtested models that validate the manager’s process or formulas and help support the manager’s story.

My goal in this article is to detach you from the headline marketing pitch often touted by these investment managers. I want Advisors to make informed decisions on whether and to what extent the tactical management story fits with their story. I want to assist Advisors  in developing criteria to select products and make informed decisions on whether tactical products are right for their clients.

Are tactical products right for your client?

Implementation of a tactical strategy in a client’s portfolio can have its merits when utilized appropriately and proportionately. Applying the word “Tactical” to an investment product is the modern day “Alpha”. The story is great and the backtest is even better.  In practice, viewing a decade long application of a model is great if your client is committed and will never modify their investment goals or asset allocations. This never happens, right?

Most tactical products are risk modifiers that have to exist in real-time. You cannot buy a backtest. Most tactical products follow one or a combination of three investment approaches: Technical, Quantitative, or Subjective. Their goals are to develop a process that will actively manage and apply risk to a portfolio when and where it should exist. Technical analysis involves examining patterns in historical asset prices and applying the successful observations to attempt to predict future patterns in asset prices. Quantitative analysis uses various known data points to formulate a strategy that can be applied systematically. Subjective analysis does not follow a model or formula, but rather is dependent upon human thought and global macro observances to determine positioning. The processes are different, but the target is often the same – great risk adjusted returns.

Deciding whether to include a tactical manager, and at which weight, in a client’s account can be determined by answering one simple question: What level of varying performance from a static benchmark will my client be willing to accept to seek better long term risk-adjusted performance?

Due to the accessibility of common index information, almost every investor falls back to comparing performance against an index. With the benefit of hindsight, one can accept that an investment may not track an index over short periods of time to attempt to produce long term over-performance. This is great, but most Advisors have to live through, and more importantly explain, the periods of underperformance relative to an index. A long term approach of capturing upside and avoiding downside is a far different concept than making the claim that those results will occur over every observable time period (daily, monthly, quarterly and annually). Performance of an account within a few percentage points of a benchmark can always be explained. Significant outperformance is always exciting news to deliver to a client. To what degree are you comfortable explaining underperformance to your clients?

If you do decide to use a tactical manager, you should be aware of the message you are delivering to your clients and put yourself in a position to effectively manage expectations. Showing a wonderful backtest may win you the client’s business, but you should understand the potential for a turbulent road ahead.  During periods when your client is lagging the benchmark, prepare yourself for a constant exercise of reminding them why they chose a tactical approach.

My advice is to know how much tactical exposure is within your client’s account. Determine what the range of risk is when the tactical manager is at their most conservative and most aggressive positioning. Apply that positioning to the worst possible market conditions for that portfolio. Most importantly, make sure your client knows this range of risks. Be in control of your client’s ever-changing portfolio.

Product Selection 

As an advisor, the success of your relationships and ultimately the profitability of your business are linked to client satisfaction and retention. Establishing a relationship built upon lofty performance goals will only set the relationship up to fail when the inevitable periodic underperformance occurs.

If you’ve determined that an allocation to tactical investments makes sense for your client’s investment objectives, the daunting task becomes sorting through the options and selecting the most appropriate solutions. I want to provide you with criteria to apply when evaluating tactical investment management options. Make sure you are asking these questions and have an understanding of the answers prior to selecting a product. I’ve always adhered to some basic principles when evaluating investment managers. First, there is no investment that you need to have. There are thousands of products in this industry and there exists not one that is irreplaceable. Second, no one has developed the perfect model. Anyone claiming this point would have already retired from its billion dollar sale to a hedge fund. The perfect model is yet to happen. Here is an abbreviated due diligence checklist to help evaluate tactical products.


Evaluation Checklist:

  1. What is the length of your track record with real client assets managed by the strategy?
  2. What were the assets invested in the strategy over that time period?
  3. Has this track record been audited by a credible auditing firm?
  4. What is your model and what indicators do you use?
  5. How often are changes made and what triggers those changes?
  6. What is your process? How and why was it developed?
  7. Who is the management team and why do I believe that this group has developed something that no one else could?
  8. What is the range of risk that could exist within the portfolio? Could there ever be leverage or high beta?
  9. How will this perform in varying market environments and why?


Obtaining clients by telling a purely tactical story can be a compelling way to diversify yourself from your competitors, but ultimately you are the one left to explain why a client’s account has lost money over a period when most global assets have had positive returns. Determine your client’s level of comfort with dynamic risk within their portfolio and select your products carefully.


Joseph Mallen

Chief Investment Strategist

Simplicity Solutions Asset Management