WASHINGTON - Tactical asset allocation has roared back in 2001, with the four largest managers alone picking up a total of more than $7 billion in institutional assets this year.
Wells Capital Management, Minneapolis, which has nearly doubled its assets in TAA this year to $4 billion, hopes to clinch another $1 billion before year end. Mellon Capital Management Corp., San Francisco, picked up 10 new clients this year and now has $32 billion in domestic TAA, up $2 billion this year. State Street Global Advisors, Boston, the nation's largest TAA manager with $52 billion, also has picked up somewhere close to $2 billion this year, and Barclays Global Investors, San Francisco, with about $22 billion in the strategy, hopes to land an additional $1 billion this year.
"TAA was dead and buried. Even though it is a three-letter acronym, it was a four-letter word" in the 1990s, said David Lunt, managing director of quantitative analysis at Wells Capital.
James W. Paulsen, chief investment officer at Wells, attributes the surge of interest in TAA to the disconnect between stocks and bonds, which has its origins in the Asian financial crisis of autumn 1998. That, combined with the persistent decline in stocks since March 2000, has led to a revival of TAA, he said.
Moreover, because stocks and bonds tend to move in opposite directions when inflation is low - and Mr. Paulsen expects the economy will stay in a low inflationary environment, possibly even heading into disinflation - he anticipates the interest in TAA will continue for several years.
Sponsors sign on
Among the plan sponsors jumping into TAA this year is Connexus Energy, a Ramsey, Minn.-based electric utility, which moved its entire $16 million pension plan into a TAA strategy with Wells Capital in May. Also, Corporate Communications Inc., a Nashville, Tenn.-based investor relations agency, placed its $50 million employer-directed profit-sharing plan into a TAA strategy managed by Wells Capital Aug. 31.
"It is a particularly good time because we think the market doesn't have much downside risk to it," said Eddie Jones, president of Corporate Communications.
Also, Larson Manufacturing Co. Inc., Brookings, S.D., which began moving 35% of its $65 million pension plan into a TAA strategy last year, is happy it did, said Walt Syltie, plan administrator, although he initially opposed the investment committee's decision.
Investors using tactical asset allocation, also sometimes called market-timing, aim to make money by shifting among stocks, bonds and cash. Money managers using the strategy typically invest passively, but sometimes act as futures overlay managers, applying S&P 500 futures or the Lehman Aggregate Broad bond index on top of a plan sponsor's underlying investments. The strategy works best when stocks and bonds are moving in opposite directions, allowing managers to make money through huge bets on the direction of one asset class versus the other.
The Wells TAA model, which typically goes long periods without shifting among asset classes, loads up on stocks when the probability of stocks outperforming bonds is greater than 83%, and moves out of stocks when their probability of outperforming bonds is less than 17%.
Wells' computer model loaded up on bonds in November 1999, and stayed overweighted in bonds for a year before shifting back into neutral, Mr. Lunt said. It shifted to stocks on March 15 and stayed overweighted there until April 30, when it moved to a neutral position that it still holds - 65% in stocks and 35% in bonds. But the model is approaching an inflection point that will trigger a shift back into equities, he said.
Wells' TAA portfolio returned -2.6% for the first seven months of 2001, compared with -2.9% for its benchmark, and logged a return of 0.4% for the 12 months ended July 31, compared with -4.9% for the benchmark. (Its benchmark combines the Standard & Poor's 500 stock index and the Lehman Aggregate index, assuming a 65% exposure in equities and 35% in fixed income.) The strategy has fared much better over the long term, logging 14% over five years, compared with 12.7% for the benchmark.
Hayden Traub, director of global asset allocation at SSgA, said his firm is actively marketing its strategy, and has found widespread investor interest. Its TAA model is tilted just slightly toward both U.S. and international stocks right now, compared with its neutral position of 50% U.S. stocks, 10% international stocks and 40% bonds.
SSgA's strategy returned -1.14% for the seven months ended July 31, compared with -0.69% for its benchmark; -1.1% for the year ended July 31 v. -1.23% for the benchmark; and an annualized 11.4% for the five years through July 31, compared with 11.93% for its benchmark. Its benchmark consists of the S&P 500 and the Lehman Intermediate bond index, assuming 50% in stocks and 50% in bonds.
Higher in stocks
Mellon Capital also has seen considerably more interest in its TAA strategy this year, said Thomas Hazuka, chief investment officer. The money manager's computer model is recommending an equity exposure in the 70% to 80% range, but Mr. Hazuka expects the stock weighting could go even higher in the next month or two as stocks begin to outperform bonds.
In March, the computer model was at full tilt in stocks with a 90% exposure (Pensions & Investments, April 2).
Year-to-date through July 31, Mellon's TAA strategy returned -2.59%, vs. -3.62% for its benchmark; in the year ended July 31 it returned -2.57%, compared with -5.69% for the benchmark; and for the five-year period, it returned an annualized 14.82%, vs. 13.46% for the benchmark. Its benchmark is the S&P 500 and the Lehman Long-Term Treasury Bond Index, assuming 65% stocks, 30% bonds and 5% in a 30-day CD
BGI, meanwhile, hasn't seen any new business pouring in but is in "pretty significant discussions," said Scott Clifford, managing director and head of asset allocation strategies. BGI's computer model is pointing toward a slight overweighting in stocks, with a 70% exposure vs. the 60% neutral position.
BGI's TAA strategy returned 0.56% in the first seven months of 2001, compared with 0.99% for its benchmark, and -6.25% for the year ended July 31 vs. -4.28% for its benchmark. It returned 13.7% for the five years ended July 31, compared with 13.49% for its benchmark of the S&P 500 and Lehman Long-Term Treasury bond index, assuming 60% invested in the S&P 500 and 40% in Treasuries.
Interest not universal
Not everyone has seen interest in TAA pick up. Edgar E. Peters, chief investment officer at PanAgora Asset Management Inc. in Boston, with about $1.5 billion in TAA, equates the strategy with earthquake insurance. People rush in to buy earthquake insurance just after an earthquake hits, and tend to lose interest in it as time elapses.
But, he warned, "The longer it's been since the last one, the more likely it's going to happen again," and he expects interest in TAA might pick up as investors realize the stock market is not going to return to its stratospheric levels any time soon.