How Good Is Tactical Asset Allocation Using Standard Indicators

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. TOPICS:Portfolio management/multi-asset allocation, portfolio theory, portfolio construction Key Findings • Tactical asset allocation decisions are often based on (and justified by) macroeconomic developments and valuation ratios. • This article shows that a simple combination approach based on percentile scores of standard indicators from four scientifically valid areas (valuation, trend, risk, and macroeconomics) can significantly improve a multi-asset portfolio’s performance and generate high information ratios. • The individual indicators and the resulting scores can be presented in a dashboard.