How Bad Is Bad?
Previously, Morningstar examined the returns of 163 TAA funds for the period ending July 2010. It’s important to note that 39 of the funds disappeared during the study period because of merger or liquidation. Of the surviving tactical strategy funds, the median life span as of July 31, 2010 was 37 months.
That study found that TAA funds generally failed to deliver better risk-adjusted returns, or downside protection, than a traditional balanced index portfolio split 60/40 between stocks and bonds, respectively.
For example, 64 of the 92 TAA funds at least a year old—that’s 70 percent—had worse performance since inception than the passively managed Vanguard Balanced Index Fund (VBINX). The average underperformance was 2.6 percentage points per year.
Morningstar later updated the study through the end of 2011. It again compared the returns of TAA funds to Vanguard’s Balanced Index Fund (VBINX), which passively invests its assets in a 60/40 stock/bond mix. The following is a summary of its conclusions:
- Very few TAA funds generated better risk-adjusted returns than VBINX.
- Just nine of the 112 TAA funds in existence over the period from August 2010 through December 2011 had higher Sharpe ratios (a measure of risk-adjusted returns) than did VBINX.
- Only 27 of the funds experienced a smaller maximum drawdown than VBINX. The majority of the funds experienced larger peak-to-trough declines.
- Only 14 of the 81 tactical funds in existence since October 2007 posted lower maximum drawdowns than VBINX during the 2008 financial crisis, the correction during the spring and summer of 2010, and during the recent European debt-related drawdown. Put another way, just 17 percent of the TAA funds consistently provided the insurance investors were paying for.
Keep these results in mind the next time you are tempted by the tactical asset allocation strategy. Bottom line: big fees, poor results. In other words, TAA is just another game where the winners are the product purveyors, not the investors.
Larry Swedroe is the director of research for the BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.