Tactical Allocation Funds: Pros and Cons

Tactical allocation funds adopt a flexible investment mandate as investments are actively rebalanced between different asset classes in response to market trends, economic developments and valuation. Fund managers can take advantage of potential investment opportunities if the outlook for a particular asset class is positive while reducing its exposure when the valuation or fundamentals of the asset class are no longer attractive.

By allowing fund managers the flexibility to rebalance the asset allocation accordingly depending on the market outlook, it enables value to be added to the fund by taking advantage of prevailing market conditions. Tactical asset allocation funds can dynamically and actively respond to macro trends in both bullish and bearish market environments. During periods of turbulence in equity markets, tactical allocation funds may utilise index futures to hedge against market volatility. By being responsive to changing market conditions, these funds can be positioned for growth in times of market up trends and be positioned defensively in times of market down trends

However, the strategies employed by tactical asset allocation funds to shift the asset mix between equities, fixed income instruments and deposit may result in increased volatility of returns. Thus, these funds are most suitable for investor with very high tolerance for risk and who seek capital growth over the medium to long term. With a potentially large percentage of their NAV invested in equities, tactical asset allocation funds are exposed to higher risks and market volatility. In addition, investment decisions pertaining to asset allocation and hedging strategies undertaken by the fund managers may adversely affect the fund's performance if the strategies adopted are not in tandem with market movements.

In conclusion, tactical asset allocation funds are suitable for investor who seek potentially higher returns produced by dynamically shifting a fund's asset allocation mi based on the outlook for the various asset classes. These fund can complement and help to diversify an existing portfolio of funds held by investor with aggressive risk profiles. As always, investor should consider their own investment goals, risk tolerance and time horizon before deciding to invest in tactical allocation funds.