Personal Finance: Beware tactical funds

Posted: February 26, 2012

Are you having a difficult time committing?

I'm talking about making up your mind whether to choose stocks or bonds, or a certain variety of one of them. After the battle scars of the last few years, it's not surprising people would be second-guessing their choices.

And after a 7 percent increase in the stock market as of mid-February, the fear of plopping new money into stocks just in time to lose in them again might be dreadful.

That's why investors are drawn to a relatively new type of fund called "tactical allocation funds." With these, you give the fund manager the discretion to move around quickly, maybe buying large-company stocks one day when he sees opportunity but selling them shortly thereafter if he spots a threat or a better opportunity.

Not all tactical funds have choices that broad, but some do. The key with all tactical funds is that you give your fund manager the freedom to decide at any moment that he wants to buy a lot of something and none of something else. You do not tie his or her hands the way you do in most mutual funds by telling the manager precisely what type of investment to buy.

A different approach. The flexibility to hop around markets and to buy and sell quickly is supposed to serve you well. It's supposed to save you when the market is about to tank, or place you at the front of opportunity when some investment is about to soar. What could be better?

The trouble is that such an approach promises more than it delivers.

Morningstar Inc. analyst Michael Herbst recently reviewed tactical funds and found what studies of investing pros have shown repeatedly: Market timing, or trying to pinpoint the time when it's worth buying one type of investment while selling another, is difficult. It sounds good, but few can carry it out well continually.

Some examples. Herbst noted that the AllianceBernstein Retirement Strategies target-date funds moved a significant amount of money out of stocks and pleased investors by avoiding harsh losses during the third quarter of 2011. But after getting that move right, he said, the fund did not move back into stocks soon enough to capture the surge that delighted investors in other funds during the fourth quarter.

Ivy Asset Strategy was an investor's dream come true during the harsh 38 percent downturn in the stock market in 2008. And it was nimble enough to position for the rise in stocks in 2009. But then it got roughed up by the flash crash in May 2010 and was not positioned well for the difficulties in stock investing in 2011, Herbst said.

The UBS Dynamic Alpha fund is supposed to be geared toward helping investors outpace inflation. But, said Herbst, the fund "has fallen far short of its goal."

In a study of tactical funds between October 2007 and December 2011, Morningstar chief investment officer Jeff Ptak found that despite all the maneuvering and esoteric, risky approaches to investing, most did not do as well as the Vanguard Balanced Index fund. That is a simple fund that uses no fancy tactics: It holds about 60 percent of investors' money in stocks and 40 percent in bonds through good times and bad, without trying to guess when it is best to buy or sell.

Some disadvantages. Tactical funds tend to be more volatile than others and also have trouble rebounding when the market is climbing after a downturn, Herbst said. Yet he has identified a few standouts. Among them, he said, are Pimco All Asset, Pimco All Asset All Authority, and Pimco Global Multi-Asset.

Even if funds seem to have good track records over several years, Herbst warns against buying them if you do not understand how the manager is going to make money and avoid losses. Some strategies are complex, involving derivatives, leverage, or borrowed money that can lead to great gains and but also explosive losses.

Since investors cannot count on the funds to be diversified, he suggests using them for only a small portion of your portfolio while keeping a wide range of stocks and bonds on an ongoing basis.


Gail MarksJarvis is a personal-finance columnist for the Chicago Tribune. E-mail her at gmarksjarvis@tribune.com.

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