Senior Director of Investments and Fiduciary Ken Lako and Regional Chief Investment Officer Dave Roda discuss strategies to consider in this current economic environment and the next phase of economic recovery.

Audio: Considering Tactical Asset Allocation in a Maturing Economy (Audio)

Transcript: Considering Tactical Asset Allocation in a Maturing Economy (Audio)

Interviewer: Ken Lako, Senior Director of Investments and Fiduciary, Wells Fargo Private Bank
Interviewee: Dave Roda, Regional Chief Investment Officer, Wells Fargo Private Bank

Ken: Hello, I’m Ken Lako, Senior Director of Investments and Fiduciary for Wells Fargo Private Bank. Joining me is Dave Roda, Regional Chief Investment Officer for the Southeast region.

Dave, the equity and bond markets have experienced impressive rallies this year. A question we often hear from clients is whether these rallies can continue and whether their portfolios are properly positioned as we enter the next phase of the economic recovery.

Dave: Ken, we all know market performance is always difficult to predict; however, there are a couple of factors to consider. First, Wells Fargo Investment Institute anticipates modestly faster economic growth and low inflation in the second half of the year, and this does bode well for equity markets. Second, stock valuations are a bit extended compared to historical averages. This would suggest that individual stock returns may track company earnings growth more closely than in the past, which implies that there may be a need to be more diversified across portfolio holdings and asset classes in order to help manage risk. With that said, in our view, investors should maintain a strategic allocation that looks beyond the current economic cycle in order to determine the mix of assets needed to help achieve their long-term investment objectives at the appropriate risk level.

Ken: Great points, Dave. Obviously, every investor has a unique set of investment goals, risk tolerance, and personal circumstances that need to be factored into their specific investment equation. Can you talk a little about strategic asset allocation and why it’s important?

Dave: Sure. So by definition strategic allocation takes into account an investor’s return objectives, tolerance for investment risk, as well as any other investment constraints. This can be used in conjunction with long-term capital market assumptions to build a diversified investment portfolio that appear most likely to meet the investor’s goals over time.

A Wells Fargo study suggests that over time, 79 percent of returns for an actively managed investment portfolio are attributable to strategic asset allocation.1 So we recommend that investors use the strategic allocation as the foundation for their investment decisions regardless of the market environment.

The study also suggests the remaining 21 percent of returns over time are attributable to tactical asset allocation and security selection. Tactical asset allocation can be defined as short-term adjustments to asset class weights that are based on shorter-term expected performance.

Moderator: Well Dave, with that in mind when should tactical asset allocation strategies be considered?

Dave: Well, Ken, there are certain times, such as when we see inflection points in the economy, rising market volatility, or a reversal in fiscal or monetary policy, when we believe implementing tactical asset allocation strategies can really help enhance portfolio returns. In fact, we see evidence of all three of those catalysts over the next 12 to 18 months.

Moderator: Given this changing economic and market environment, what tactical strategies do you suggest?

Dave: We suggest investors consider the following tactical asset strategies, where appropriate, in this dynamic environment:

  • First, review your international equity diversification. U.S. equities have outperformed in recent years and are now trading at higher valuations than most other developed market and emerging market economies. This is at a time when monetary support is waning in the U.S. but remains in high gear overseas.
  • Also, consider your exposure to both passive and actively managed investment products. Wells Fargo Investment Institute forecasts lower equity returns and greater market volatility and because of these conditions believes that security selection likely will play a larger role in portfolio performance and risk management over the next 12 to 18 months.
  • For qualified investors, hedge funds and other alternative investments may be a viable strategy. Historically, adding alternative investments to a diversified portfolio can potentially reduce portfolio volatility and lower correlations to equity markets and interest rates. I have to say, Ken, these strategies are not suitable for everyone. Investors should seek professional advice to determine whether any of these strategies are appropriate given their individual goals and circumstances.
Ken: Dave, I want to thank you for joining me today to discuss the importance of strategic and tactical asset allocation in this current market environment. And a special thank you to our audience for joining us.


1 "Determinants of Portfolio Returns," Wells Fargo Wealth Management, 11/11, Wells Fargo Investment Institute