An Introduction to Tactical Asset Allocation Funds

Tactical asset allocation funds have the potential to maximise returns during periods of volatile market conditions.

Tactical asset allocation is an active portfolio management strategy that rebalance the proportion of assets held in a fund to capitalise on market trends. This strategy is suitable for investor with aggressive risk profiles and who are able to withstand high volatility of returns in pursuit of capital growth over the medium to long term period. Tactical allocation funds adopt a flexible investment strategy and give the mandate to fund managers to actively respond to changes in both bullish and bearish market environments.

In tactical asset allocation funds, which is also known as flexible or dynamics asset allocation funds, enable portfolio management strategy and rebalance their asset allocation between different asset classes of equities, fixed income securities and money market instruments depending on the market outlook. Tactical asset allocation funds have the widest range of equity weights when compared to equity and balanced funds. They adopt a flexible investment strategy that allows fund managers to take advantage of investment opportunities in the marketplace by actively rebalancing the asset allocation of the funds. Under the Lipper Global classification system, tactical asset allocation funds are categorised as mixed asset flexible funds.

When the market outlook is positive, fund managers may fully invest the fund's net asset value (NAV) in equities. However, when the investment climate is deemed unfavourable and weakness in equity markets is anticipated, tactical asset allocation funds may adopt defensive strategies by lowering their equity exposures to as low as zero by increasing investments in fixed income securities and liquid assets. If the outlook for fixed income securities and liquid assets is also unfavourable, fund managers may move the investments to deposits.

To optimise their returns, tactical allocation funds may also invest in futures contracts and options to hedge against market volatility.