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How Good Is Tactical Asset Allocation Using Standard Indicators?


Schnetzer, Michael (2020). How Good Is Tactical Asset Allocation Using Standard Indicators? Journal of Portfolio Management, 46(6):120-134.

Abstract

Tactical asset allocation decisions are often based on (and justified by) macroeconomic developments and valuation ratios. However, why should using such publicly available information provide an investment edge? This article investigates whether a simple combination approach based on popular indicators can improve a multi-asset portfolio’s performance. The author developed a method to assess each asset class’s attractiveness using standard and economically motivated indicators from four scientifically valid areas (valuation, trend, risk, and macroeconomics). Each indicator was evaluated relative to its own history, assigned a percentile score, and over- or underweights per asset class were determined based on the combined, equal-weighted score. This intuitive method generated high information ratios and a significant outperformance for a portfolio invested in stocks and bonds in the United States, the United Kingdom, the Eurozone, and Japan. The results held up in various robustness checks and were stronger for riskier assets. The individual indicators as well as the resulting scores can be presented in a dashboard.

Abstract

Tactical asset allocation decisions are often based on (and justified by) macroeconomic developments and valuation ratios. However, why should using such publicly available information provide an investment edge? This article investigates whether a simple combination approach based on popular indicators can improve a multi-asset portfolio’s performance. The author developed a method to assess each asset class’s attractiveness using standard and economically motivated indicators from four scientifically valid areas (valuation, trend, risk, and macroeconomics). Each indicator was evaluated relative to its own history, assigned a percentile score, and over- or underweights per asset class were determined based on the combined, equal-weighted score. This intuitive method generated high information ratios and a significant outperformance for a portfolio invested in stocks and bonds in the United States, the United Kingdom, the Eurozone, and Japan. The results held up in various robustness checks and were stronger for riskier assets. The individual indicators as well as the resulting scores can be presented in a dashboard.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > General Business, Management and Accounting
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Language:English
Date:2020
Deposited On:09 Feb 2021 07:04
Last Modified:10 Feb 2021 21:00
Publisher:Institutional Investor
ISSN:0095-4918
OA Status:Closed
Publisher DOI:https://doi.org/10.3905/jpm.2020.1.145
Official URL:https://jpm.pm-research.com/content/46/6/120.short
Other Identification Number:merlin-id:20675

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