Harvesting Alpha via Tactical Asset Allocation - why? how?
TAA and Global Macro managers seek to add value by correctly predicting which asset classes (or currencies) will outperform or underperform. A new paper from William Blair, below, sets out succinctly the case for a global macro strategy - not only to take advantage of market opportunities, but also adding macro diversification.
Some managers will take a fundamental approach to TAA, starting with their view of the global economy. In this regard, Wellington Management points out the importance of knowing from where (geographically) equity revenues originate. Equity indices do not necessarily reflect a reliance on the domestic economy. However, STOXX has come up with a solution to this (below), developing new indices which reflect the relationship between a company's earnings and its exposure to the domestic economy.
Most of the remaining papers, curated below, discuss systematic - or quantitative - approaches to adding alpha from tactical asset allocation.
The Case for Macro (William Blair, July 2017)
Macro investors analyze broad trends with a top-down view of the global economy in order to allocate risk accordingly—resulting in a liquid strategy that seeks to provide substantial risk-adjusted returns. This paper examines further.
STOXX TRU UK Indices - A More Precise Benchmark for UK Equity Investment
The STOXX TRU UK indices have been created to allow investors to capture the return of UK equities with selected levels of revenue exposure to the UK economy. But what does this mean for investors?
Do you know where your equity revenues are coming from? (Wellington, 2017)
Although global macro risks are top of mind these days, many investors are unaware of the extent to which political or economic trouble elsewhere in the world could affect their equity holdings. Nanette Abuhoff Jacobson explores further.
Five-Year Capital Market Outlook (Willis Towers Watson, 2017)
This paper by Willis Towers Watson takes an in-depth look at the capital market outlook over the next 5 years. It covers portfolio construction, risk management, implementation and monitoring, among other key topics.
A Quantitative Approach to TAA (Mebane Faber)
This influential paper by Mebane Faber is an update to his 2006 version. Bringing in new data from the period 2008-2012. Interestingly, he examines how well the original work has held up since publication.
Risk Parity, Momentum and Trend Following in Global Asset Allocation (2014)
The authors of this paper examine the effects of trend application methodologies when applied to global asset allocations amongst commodities, bonds and real estate.
Value and Momentum in Tactical Asset Allocation (2012)
This paper presents a concise quantitative method for combining value and momentum strategies in a TAA framework by forming direct comparisons in the attractiveness of valuations across an extended range of asset classes.
Structural Trends in Equity Market Valuation (Absolute Return Partners, 2015)
This April 2015 document from Absolute Return Partners looks at the structural factors that drive equity prices, including Corporate Profits as a share of GDP, dividends and share buy-backs, demographics, interest rates and valuations.
Capital Market Assumptions: BlackRock methodology for long-term returns (2017)
What level of return can investors expect in the long-term across asset classes? This paper presents BlackRock Investment Institute’s methodology for long-term equilibrium capital market assumptions.
Currency: The Carry and Value Pendulum (PIMCO, 2016)
Alternative risk premia portfolios are becoming increasingly popular as many investors look to build returns and diversification. In this paper, the authors focus their discussion on Carry and Value in particular.
Currency Carry Unwinds: When Carry Goes Bad (Financial Analysts Journal, 2017)
This 24-page paper appears in CFA Institute's Financial Analysts Journal. It looks back and analyzes the worst episodes of currency carry loss in recent years.